FRAUD, MONEY LAUNDERING AND FORENSIC AUDIT

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FRAUD, MONEY LAUNDERING AND FORENSIC AUDIT

  1. 1. APT Financial Consultants Sako Mayrick, 2008 1
  2. 2. Fraud is a deliberate misrepresentation which causes another person t suffer d th to ff damages, usually, monetary losses Error is an unintentional misstatement in th E i i t ti l i t t t i the financial statements APT Financial Consultants Sako Mayrick, 2008 2
  3. 3. Irregularities are intentional misstatement or omissions i fi i i in financial statements, i l di i l t t t including fraudulent financial reporting (management reporting) or misappropriation of assets (defalcation) APT Financial Consultants Sako Mayrick, 2008 3
  4. 4. Mistake in gather or processing data from financial statements Incorrect accounting estimate arising from oversight or misrepresentation g p of fact APT Financial Consultants Sako Mayrick, 2008 4
  5. 5. Mistake in the application of accounting principles relating to recognition, classification, classification presentation or disclosure measurement, recognition classification, presentation or disclosure Errors are therefore the normal risk factors of a well d i f ll designed ICS which i working d hi h is ki perfectly. APT Financial Consultants Sako Mayrick, 2008 5
  6. 6. Intentional act by one or more individuals among management , those charged with governance, employee or third parties involving the use of deception to obtain an unjust or illegal advantage Auditor is concerned with material misstatement APT Financial Consultants Sako Mayrick, 2008 6
  7. 7. Management fraud is a fraud which involves one or more members of management or those charged with governance Fraud involving employee of an organisation is referred as employees fraud A third party may be involved in whole SCAM h d b l d h l ( a clever but dishonest way to get money. APT Financial Consultants Sako Mayrick, 2008 7
  8. 8. Larcency – is a wrongful taking and carrying away of personal property of another Embezzlement is a fraudulent appropriation of pp p the property by a person entrusted with its custody, thus breaching the trust or fiduciary responsibly APT Financial Consultants Sako Mayrick, 2008 8
  9. 9. If the stealing occurs simultaneous with taking possession it is larcency If stealing occurs subsequent to p g q possession the crime is embezzlement APT Financial Consultants Sako Mayrick, 2008 9
  10. 10. Fraud may involve p / Manipulation, falsification/alteration of records or documents Misappropriation of assets Suppression or omission of the effect of transaction from records or documents Recording transaction without substance R di t ti ith t b t Misapplication of accounting principles APT Financial Consultants Sako Mayrick, 2008 10
  11. 11. Disguise – masking identity , activities so as to make it have appearance of legitimacy Divergence – departure from the norms, it must be masked Diversion – distracting relaxing Conversion - unauthorized at that deprive the owner his property permanently or for an indefinite time APT Financial Consultants Sako Mayrick, 2008 11
  12. 12. Cash conversions Accounts payable diversions Stock diversions Debtors conversions Manipulations Lapping Kiting g Teeming and lading Undervaluation of stocks undercastingg Payments of fictitious debtors Ghost payroll registers Collusion with suppliers on discount or over invoicing APT Financial Consultants Sako Mayrick, 2008 12
  13. 13. The primary responsibility for prevention/and detection of fraud and error rests with management and those who are charged with governance However, However the auditor should consider the risk of material misstatement in F/S resulting from fraud or error error. APT Financial Consultants Sako Mayrick, 2008 13
  14. 14. Opportunity- due to weak And A d override of controls id f t l Pressure Fraud Need/ Unrealistic Corporate Rationalization Target can •Every one y Force Does it Employees to •Simply borrow Commit fraud -money APT Financial Consultants Sako Mayrick, 2008 14
  15. 15. Fraudulent financial reporting Misappropriation of assets APT Financial Consultants Sako Mayrick, 2008 15
  16. 16. Omission of amounts to deceive F/S users Deception – manipulation, falsification or alteration of accounting records or supporting documents Misrepresentation – intentional omission from, the p financial statement of events transactions or other significant information Intentional misappropriation of accounting pp p g principles l Misappropriation of assets Embezzling receipt g p Payment of goods and services not received APT Financial Consultants Sako Mayrick, 2008 16
  17. 17. Primary responsibility for prevention and detection of frauds and errors rests with d t ti ff d d t ith those charged with governance of an entity Create a culture of honest and high ethics Establish appropriate controls to prevent and detect frauds and errors within an entity y APT Financial Consultants Sako Mayrick, 2008 17
  18. 18. Those charged with governance Ensure oversight of management E i ht f t Integrity of organisation Integrity of entity’s accounting and financial g y y g reporting systems Appropriate controls Risk monitoring Financial control Compliance with law APT Financial Consultants Sako Mayrick, 2008 18
  19. 19. Those charged with governance Establish a control environment and maintain E t bli h t l i t d i t i policies and procedures to achieve objectives Ensure as far as possible , the orderly and efficient conduct of entity’s business Implementing and ensuring the continued operations of accounting and ICS which are i f i d hi h designed to prevent and detect frauds and errors Audit risk can never be eliminated but can be reduced APT Financial Consultants Sako Mayrick, 2008 19
  20. 20. Purpose of audit is to ensure F/S taken as a whole are free from material misstatement whether caused by error or fraud Auditor should act with skill and care that would be exercised by a reasonably competent auditor in circumstances APT Financial Consultants Sako Mayrick, 2008 20
  21. 21. Audit should design his work to have reasonable expectation of detecting material misstatement which might i i t t t hi h i ht impair th t th i the truth and fairness of financial statements Misstatement should either be corrected or properly disclosed He should remind management of their responsibility to maintain proper ICS Auditor is not and can not be held responsible for fraud and error. APT Financial Consultants Sako Mayrick, 2008 21
  22. 22. In planning an audit, audit team should discuss the susceptibility of entity to material misstatements resulting fraud and error Discussion will help members of audit team to gain a better understanding of the potential material misstatement in F/S resulting from fraud and errors APT Financial Consultants Sako Mayrick, 2008 22
  23. 23. In planning and the audit, auditors should make inquiries of management for Management risk assessment on fraud ICS should address such risks ICS to prevent and detect fraud Management awareness of any known fraud which has affected the entity Management discovered any material error APT Financial Consultants Sako Mayrick, 2008 23
  24. 24. The auditor should approach his work with professional skepticism f i l k ti i Need for management representation Acknowledgement of responsibility of ICS A k l d f ibili f Disclosure of all significant fact on fraud. APT Financial Consultants Sako Mayrick, 2008 24
  25. 25. Unrealistic time deadlines for audit completion imposed by management Reluctance for frank communication with third party e.g. banker Limitation of scope imposed by mgt p p y g Identification of significant matters not previously disclosed by mgt Significant difficulties to audit figures in accounts APT Financial Consultants Sako Mayrick, 2008 25
  26. 26. Aggressive application of accounting p gg pp g principles p Information provided unwillingly or after unreasonable delay Unsupported transactions Fewer confirmation responses Evidence of unduly lifestyle by officers or employees Long outstanding account receivable balances APT Financial Consultants Sako Mayrick, 2008 26
  27. 27. The type of fraud/error and likelihood of occurrence determines the nature, timing and extent of audit procedures APT Financial Consultants Sako Mayrick, 2008 27
  28. 28. Additional tests ( procedures) If it appears th t an error or i that irregularity h l it has occurred, the auditor should consider its nature, cause and likely effect on F/s If satisfied that irregularities are not material to F/S, he should nevertheless concerns with appropriate level of management , in order to determine further action to be taken e.g. amendment of ICS in order to reduce or ICS, eliminate such errors or irregularities in the future APT Financial Consultants Sako Mayrick, 2008 28
  29. 29. Employee fraud Example : outright theft, embezzlement, E l t i ht th ft b l t defalcation, misappropriation and manipulation of records Falsifying expense reports, staff claims, embezzling fund, using corporate property for personal benefit, stealing property, accepting gratuities from vendors, contractors and supplies d t t d li APT Financial Consultants Sako Mayrick, 2008 29
  30. 30. Causes Weak ICS Employment of dishonest employees Personal financial problems to staff bringing p g g financial difficulties Indicators Poor documentation False & improper entries in records Unauthorized payments Unauthorized use of corporate assets Misapplication of funds APT Financial Consultants Sako Mayrick, 2008 30
  31. 31. Deceitful practices, benefiting economically, socially or sustain jobs to detriment of the organisation i ti Due to absolute powers, faith and trust Management are not subject t ordinary checks M t t bj t to di h k like subordinates,; they can easily capitalize on opportunity to conceive or conceal fraud pp y Crimes are committed to deceive investors, owners, tax authorities or inflate profits to earn higher l i hi h salaries and bd bonuses APT Financial Consultants Sako Mayrick, 2008 31
  32. 32. Indicators Delay in submission of report Incompatible functions done by one person Flouting corporate directives, rules and regulations l d l d l Personal interest Duplicate entries Uncorrelated entries High fly mgt decisions APT Financial Consultants Sako Mayrick, 2008 32
  33. 33. Control Enhancement of control environment e.g. junior officer enjoying lavish entertainment, luxurious lifestyle Creation of check and balances system APT Financial Consultants Sako Mayrick, 2008 33
  34. 34. Realistic targets, standards and business norms Quantitative and analytical techniques to discover diverse trends and abnormal behaviour in operation Feedback on quantitative and analytical q y techniques Comparison with norms of the industry APT Financial Consultants Sako Mayrick, 2008 34
  35. 35. Clear distinction btn acceptable p p performance and or efficiency operations substandard Vs standard Introduce surveillance review procedures by introducing strong IA or constituting surveillance committee with necessary independence y p Consider departure from approved targets Identify instances or adverse trends in business operations APT Financial Consultants Sako Mayrick, 2008 35
  36. 36. Crime committed by officers ( Directors, CEO, y , , Employees, agents) to employer e.g. fraud, embezzlement or corruption Crime committed b external f Ci itt d by t l forces against th i t the company e.g. robbery, larcency, bulgarly, piracy Crime committed by senior offcers and other internal y agents on behalf of corporations e.g. non-compliance with regulations, tax evasion, bribery and false financial reports APT Financial Consultants Sako Mayrick, 2008 36
  37. 37. Fraud means intentional deception, lying cheating, most of fraud are discovered in normal financial audit ff d di di l fi i l di Knowledge of existence of fraud comes to light when one or both of the following events takes place Allegation/complaints by 3rd party Investigators’ intuition/ general suspicion that something is awry g y Auditor discovery of accounting discrepancy Sudden discovery that something is missing APT Financial Consultants Sako Mayrick, 2008 37
  38. 38. Crimes committed for entity Crimes committed against the entity APT Financial Consultants Sako Mayrick, 2008 38
  39. 39. Violations of laws or regulations; tax laws; pension laws, labour laws The entity is perpetrator if convicted Th i i i d becomes victim of legal fees, fines, penalties/damages Usually are committed by senior managers who wish to enhance financial position through overstating incomes, sales, assets and by understating expense and liabilities Evasion of taxes of taxes and expenses ( overstated) APT Financial Consultants Sako Mayrick, 2008 39
  40. 40. , , p Theft, embezzlement of funds, corruption by y vendors, contractors, by external agents or officers of the entity The Th company become victim of the crime e.g. b i i f h i purchasing officers defrauding the corporation by substituting an inferior quality/ merchandize or double billing an order Bribery of employees by vendors APT Financial Consultants Sako Mayrick, 2008 40
  41. 41. Use of sampling Absolute assurance Vs reasonable assurance Ab l t V bl Use of judgement Inherent limitation of ICS Persuasive rather than conclusive evidence The risk of not detecting material misstatement resulting g g from fraud is higher than the risk of not a material misstatement resulting from error, because fraud may involve sophisticated and carefully organized schemes designed to conceal it such as forgery, deliberate failure to record transaction APT Financial Consultants Sako Mayrick, 2008 41
  42. 42. Skilfulness of the p p perpetrator Frequency and extent of manipulation Degree of collusion involved g Relative size of the individual amounts The seniority of those involved Audit procedures that are effective for detecting errors may be ineffective for detecting fraud. APT Financial Consultants Sako Mayrick, 2008 42
  43. 43. Possibility of override control procedures Generally subsequent discovery of material G ll b t di f t i l misstatement of f/s resulting from fraud or error does not in and of itself indicate Failure to obtain reasonable assurance Inadequate planning, performance or judgement Absence of professional competence and due care Failure to comply with ISAs Audit i k A dit risk model t b remodelled f di d l to be d ll d for discovery of f fraud or error APT Financial Consultants Sako Mayrick, 2008 43
  44. 44. The auditor should assess fraud risk factors e.g missing document, G/L out of balance or ARP may not make sense However, fraud risk factors do not necessarily indicate the existence of fraud, they often have been present in circumstances where fraud have occurred. APT Financial Consultants Sako Mayrick, 2008 44
  45. 45. COMPANIES ACT The Companies Act not fix any responsibility to auditor for fraud/ improprieties. The auditor is not bound to exercise more than reasonable skill and care even situations where there i suspicion of f d committed h is i i f fraud i d Apart from absence of legal requirements to detect d t t corporate f d th auditing profession t fraud, the diti f i points to the nature of fraud committed as a major reason for accepting extended detection duties also the responsibilities on preceding p part APT Financial Consultants Sako Mayrick, 2008 45
  46. 46. One of the characteristics features of fraud as opposed to error it is that the perpetration is accomplished with attempts to conceal it li h d ith tt t t l This apply particularly to frauds commitment by management who usually have power to introduce complexity in corporate structure to make transactions or systems to override IC. Influence accounting policies and manipulate evidence e idence APT Financial Consultants Sako Mayrick, 2008 46
  47. 47. Input, processing and output APT Financial Consultants Sako Mayrick, 2008 47
  48. 48. Factors that promote the discovery of computer theft, fraud and embezzlement theft Internal accounting controls Separation of duties Rotation of duties Internal audit and surprise checks Development of policies, procedures, operating programs Parity f th i ti P it of authorization, authorization li it th i ti limits and comparison with limit/budgets Off-line entry controls y APT Financial Consultants Sako Mayrick, 2008 48
  49. 49. Factors that promote the discovery of computer theft, fraud and embezzlement theft Computer access controls Identification controls Authentication controls Compartmentalization (establish authorization by levels) Logging exceptions Out f O t of sequence, out priority aborted runs t i it b t d Variance reporting APT Financial Consultants Sako Mayrick, 2008 49
  50. 50. Auditor s role Auditor’s Aware of changes in control to avoid obsolescence of controls due to reorganisation, business re- engineering and business downsizing APT Financial Consultants Sako Mayrick, 2008 50
  51. 51. Auditor’s and fraud investigators must be conversant with pre-conditions for detecting pre conditions fraud Determining organisations risk of fraud by g g y studying its operational and control environment Thoroughly understanding symptoms of fraud Thoroughly understanding symptoms of fraud Being alert of occurrence of these symptoms APT Financial Consultants Sako Mayrick, 2008 51
  52. 52. Examine the operational environment and its controls to identify weakness and deficiencies (Opportunities) Deterrence, detection and reporting of fraud requires an auditor to have sufficient knowledge of possible frauds to be able to identify their symptoms APT Financial Consultants Sako Mayrick, 2008 52
  53. 53. Unauthorized transactions Cash shortages C h h t Unexplained variation in prices Mi i d Missing documentation t ti Excessive refunds An effective approach is to develop a list of each type of exposure identified during the p planning stage of an audit by adjusting g g y j g inventory files, increase amount of deposit in transit and unexplained variances APT Financial Consultants Sako Mayrick, 2008 53
  54. 54. Once a typical symptoms have been outlined, auditors must determine the most efficient dit td t i th t ffi i t way of detecting their presence Other Oth possible signs of fraud ibl i ff d Living beyond ones means Drug and alcoholic abuse High personal debt/loses Compulsive g p gambling/stock speculation g/ p APT Financial Consultants Sako Mayrick, 2008 54
  55. 55. Management Environment Pressure P Management style and attitude Competitive and business environment e g e.g. technology Employee relationship ( spouse receiving non competitive contract) Attractive assets Internal controls I t l t l Lack of separation of duties Too much trust placed on few employees APT Financial Consultants Sako Mayrick, 2008 55
  56. 56. Fraud risk factors Risk of increase IT, increases the risk of manipulation, access control p , Remember the use of CAATs can help APT Financial Consultants Sako Mayrick, 2008 56
  57. 57. It is primarily concerned with collecting, analysing evidence to assess allegations of specific wrong doing. After a thorough evaluation of control framework, the weakness and fraud exposures identifies may prompt fraud examination but also they may not APT Financial Consultants Sako Mayrick, 2008 57
  58. 58. y p Once the symptoms of fraud are found and additional tests have indicated that there is a strong possibility of fraud, the review enters the formal investigation phase Auditor must clarify; Results of investigation can be used later as an educational tools for auditors, fraud investigators and other employees APT Financial Consultants Sako Mayrick, 2008 58
  59. 59. Briefing by the client, followed by letter of engagement detailing the initial scope of work Communication with parties involved e.g. external auditors ( if not the firm) audit committee and accounting staff Determining the extent of fraud Interviewing the defrauder g Investigating the known area with detailed audit test. E.g. Exhaustive checks, wages, cash debtors and stock Report to the management on the findings, with copies to interested parties e.g. ex- auditor, audit committee. committee APT Financial Consultants Sako Mayrick, 2008 59
  60. 60. Circumstances which led to investigation Fraud discovered and their extent Identity of the defrauder Effects on the reported profit of the past period Effects on f/s of current periods APT Financial Consultants Sako Mayrick, 2008 60
  61. 61. IC weakness which allowed the fraud and recommendations for eliminating them Report of any interviewing with the defrauder, including offers of restitution etc, which may be relevant to management in deciding what action, if any they should t k against hi /h take i t him/her If there is any suggestion that the external auditors has been negligent the extent of claim against him. APT Financial Consultants Sako Mayrick, 2008 61
  62. 62. Auditor should Consider the potential effects in F/s Where the fraud is material the auditor should modify th audit procedures so as t perform dif the dit d to f procedures appropriate to circumstances depending on the type of the fraud/error suspected, the likelihood f th i lik lih d of their occurrence and extent of d d t t f damage in the F/s APT Financial Consultants Sako Mayrick, 2008 62
  63. 63. If some proof of fraud exists, management has several options Cause a deeper audit to be done if amount of loss appears substantial Terminate employee responsible if loss is minimal File l i to Fil a claim t recover a l loss f from clients fid lit li t fidelity insurance agent Arrange with law enforcement agents to probe into the matter APT Financial Consultants Sako Mayrick, 2008 63
  64. 64. If some proof of fraud exists, management has several options Engage a private investigator to probe into the loss g g g and document it for claim purpose/prosecution Disreard losses if minimal and tighetn controls Alert th di t Al t the directors, audit committees or the board dit itt th b d APT Financial Consultants Sako Mayrick, 2008 64
  65. 65. g Strong ICS is not a warrant from fraud Client should have an effective anti-fraud and corruption strategy which is aimed at encouraging prevention, promote early detection and respond to concern raised Awareness programs to employees Screening job applicants S i j b li t Sound corporate policy on fraud AVOID atmosphere o d st ust and paranoia by O at osp e e of distrust a d pa a o a over-emphasising fraud deterrence measures. APT Financial Consultants Sako Mayrick, 2008 65
  66. 66. It is important to stick to facts, and to discount hearsay, rumour, or opinion and record what is relevant to the cause of the incident and its effect Audit reports on fraud and other improprieties should be addressed to the righ person who can take action APT Financial Consultants Sako Mayrick, 2008 66
  67. 67. p Report must contain all details of fraud Must provide framework to analyse the fraud case Must enable the user to develop improved management and security policies and detect and prevent fraud. Investigation and reporting should proceed in such a way that the outcome will be litigated. Recording exact times, data, names of person and specific; description of evidence are critical in civil or criminal investigation f id iti l i i il i i li ti ti or litigation APT Financial Consultants Sako Mayrick, 2008 67
  68. 68. p g g Reporting to management Suspicion of fraud with potential effect on f/s Fraud/significant errors Reporting to users of the audit reports Qualified opinion/disclaimer or limitation of scope Reporting to regulatory/enforcement authorities. APT Financial Consultants Sako Mayrick, 2008 68
  69. 69. APT Financial Consultants Sako Mayrick, 2008 69
  70. 70. Understand the meaning of money laundering Exemplify money laundering p y y g Describe the money laundering process Understand Tanzania perspective of money l laundering d Describe the audit implication of money laundering Discuss the challenges of combating money laundering in Tanzania APT Financial Consultants Sako Mayrick, 2008 70
  71. 71. Definition Just remember the literary word laundry ( cleaning) and therefore; Money laundering, the metaphorical quot;cleaning of moneyquot; with regard to appearances in law, is the practice of engaging in specific financial transactions in order to conceal the identity, source, and/or destination of money, and is a main operation of underground economy d d APT Financial Consultants Sako Mayrick, 2008 71
  72. 72. Definition “The process used to disguise the source of money or assets derived from criminal activity” Conduct t d i di C d t or acts designed in whole or in part to h l i tt conceal or disguise the nature, location, source, ownership or control of money (can be currency etc To move illegally acquired cash through financial systems so that it appears to be legally acquired APT Financial Consultants Sako Mayrick, 2008 72
  73. 73. Definition Money laundering is the process whereby the origin of dishonest and/or illegally obtained money is concealed so that it appears to come from a legitimate source. h f l A process that makes money with an illegal origin appear legal so that it may be used. g y the methods criminals use to hide and disguise the origin of the money they make from their crimes. The term laundering is used because criminals need to turn their quot;dirtyquot; criminal money into clean funds that they can use without arousing suspicion. APT Financial Consultants Sako Mayrick, 2008 73
  74. 74. Definition the willful concealment of the existence, illegal source, or illegal use of proceeds, and the disguise of them as legitimate There is international concern that the multimillionaire Osama bin Laden and his wealthy backers have created a y sprawling global network of funds. the process of converting illegally earned assets, originating as cash to one or more alternative forms to cash, conceal such incriminating factors as illegal origin and true ownership. APT Financial Consultants Sako Mayrick, 2008 74
  75. 75. Definition D fi iti concealing the source of illegally g g y gotten money Include: Drug trafficking Extortion Corruption Fraud APT Financial Consultants Sako Mayrick, 2008 75
  76. 76. Money laundering is the process by which large amounts of M l d i i th b hi h l t f illegally obtained money (from drug trafficking, terrorist activity or other serious crimes) is given the appearance of having ) g pp g originated from a legitimate source. If done successfully, it allows the criminals to maintain control successfully over their proceeds and ultimately to provide a legitimate cover for their source of income. Money laundering plays a fundamentall role iin f ilit ti th ambitions of th d f d t l facilitating the biti f the drug trafficker, the terrorist, the organised criminal, the insider dealer, the tax evader as well as the many others who need to avoid the ki d of attention f id h kind f i from the authorities that sudden h h ii h dd wealth brings from illegal activities. By engaging in this type of activity it is hoped to p y p place the pproceeds beyond the reach of y any asset forfeiture laws. APT Financial Consultants Sako Mayrick, 2008 76
  77. 77. Criminals want to: Avoid prosecution p Increase profits Avoid i A id seizure of accumulated wealth f l t d lth Appear legitimate Tax evasion They are trying to conceal the origin of the cash APT Financial Consultants Sako Mayrick, 2008 77
  78. 78. y g Money laundering is often described as occurring in three stages: placement, layering, and integration. Placement: refers to the initial point of entry for funds derived from criminal activities. Layering: refers to the creation of complex networks of t t k f transactions which attempt t ti hi h tt t to obscure the link between the initial entry point, and the end of the laundering cycle. g y Integration: refers to the return of funds to the legitimate economy for later extraction. APT Financial Consultants Sako Mayrick, 2008 78
  79. 79. Money laundering is a complex p y g p process, which is accomplished through three main phases. The first phase is the physical disposal of the cash, i.e. placing the p proceeds of p predicate criminal activities into bank or non- bank financial institutions in order to disguise their illegal origins and make them appear to be legitimate funds. This may include the use of ‘front’ businesses such y as hotels, cinemas or casinos that may reasonably claim to do business in cash. It may also involve the use of ‘smurfing’ techniques, through which launderers make g q , g numerous deposits of amounts of money that are small enough to avoid raising suspicion or triggering reporting mechanisms. This process is called ‘placement’. p p APT Financial Consultants Sako Mayrick, 2008 79
  80. 80. The second phase is the movement of funds from institution to institution to hide their origins and i i i i i i hid h i i i d ownership, termed ‘layering’. It consists of putting the funds, which have entered into the financial system, through series of financial operations to mislead potential investigators and to give the funds the appearance of having legal origins. For this launderers use financial institutions t at p o de legally p otected a c a st tut o s that provide ega y protected banking or offshore mechanisms. The final stage is to integrate criminal assets into the mainstream of commerce and investment in an ostensibly legitimate business. This is termed ‘integration’. The funds may be re-introduced into the economy through, for instance, the purchase of luxury items or through investment in assets such as shares in it th hi t ti t h h i companies and real estate. APT Financial Consultants Sako Mayrick, 2008 80
  81. 81. The main objectives of money launderers are thus to place their funds in the financial system without l h i f d i h fi i l ih arousing suspicion, to move them around, often after a series of complex transactions crossing multiple jurisdictions so that it becomes difficult to identify their original sources, and finally to move the funds back into the financial and business systems so that they appear legitimate. appea eg t ate. Money laundering is performed systematically and clandestinely, clandestinely making it difficult to identify exactly how much money is involved, what methods are employed and what the magnitude of the problem is. Likewise, secrecy makes it difficult to establish the y magnitude of funds used for the funding of terrorism. APT Financial Consultants Sako Mayrick, 2008 81
  82. 82. Hide: to reflect the fact that cash is often introduced to the economy via commercial concerns which may knowingly or not knowingly be part of the laundering scheme, and it is these which ultimately p y prove to be the interface between the criminal and the financial sector Move: clearly explains that the money launderer uses transfers, sales and purchase of assets, and changes the shape and size of the lump of money so as to obfuscate the trail between money and crime or money and criminal. Invest: the criminal spends the money: he/she may invest it in assets, or in his/her lifestyle assets APT Financial Consultants Sako Mayrick, 2008 82
  83. 83. If a p g g person is making thousands of shillings in small change a week from a business (not unusual for a store owner) and wishes to deposit that money in a bank, it cannot be done p y , without possibly drawing suspicion. In Tanzania, for example, cash transactions and deposits of more than a certain shilling amount are required to be reported as quot;significant cash transactionsquot;.quot; In other jurisdictions suspicion- based requirements are placed on financial services employees and firms to report suspicious activity to the authorities. Methods to conceal the source are therefore required required. APT Financial Consultants Sako Mayrick, 2008 83
  84. 84. One method of keeping this small change private would be for an individual to give money to an intermediary who i already t i t di h is l d legitimately taking in large amounts of cash. The intermediary would then deposit that money into an account, take a premium, and write a cheque to the individual. Thus, the individual d i di id l draws no attention to himself, and tt ti t hi lf d can deposit his cheque into a bank account without drawing suspicion. This works well for g p one-off transactions, but if it occurs on a regular basis then the cheque deposits themselves will form a paper trail and could raise suspicion suspicion. APT Financial Consultants Sako Mayrick, 2008 84
  85. 85. Corruption ( if y g $100,000 today through p you get y g corruption, will you deposit into your bank account?) Drug production and trafficking Embezzlement, misappropriation and theft of public funds Tax exemptions and evasions Smuggling of arms, minerals and dangerous materials (It is reported that between 1995 and 2002 Tanzania lost more than Tsh300 billion (US$300 million) through the smuggling of tanzanite from the country ) APT Financial Consultants Sako Mayrick, 2008 85
  86. 86. Stolen motor vehicles (The trade in stolen motor vehicles or their parts generates substantial illicit proceeds. The police say they have identified the criminal syndicates responsible for these crimes. Gangs of motor vehicle thieves are concentrated in cities and towns such as Dar es Salaam, Arusha, Moshi, Mwanza and Mbeya APT Financial Consultants Sako Mayrick, 2008 86
  87. 87. Poaching Trafficking of human Informal financial system (Another area that has not been given sufficient attention, and which can be used to facilitate money y laundering and terrorist financing in Tanzania, involves informal dealings in funds without the use of the formal fi h f h f l financial institutions) i li i i ) APT Financial Consultants Sako Mayrick, 2008 87
  88. 88. Terrorism Tanzania has experienced the adverse effects of terrorist attacks. On 7 August 1998, terrorists bombed the US Embassy in Dar es Salaam It is said that the terrorist attack in 1998 was co-ordinated, financed and/or carried out by al-Qaeda, led by the / y Q , y Saudi fugitive, Osama Bin Laden.61 APT Financial Consultants Sako Mayrick, 2008 88
  89. 89. Several regulatory mechanisms are in p g y place to address these problems. They include the Bank of dd th bl Th i l d th B k f Tanzania (BoT) Circular No. 8 of 2000, which obligates banks and financial institutions to: d t ti adopt anti-money l d i laundering policies and procedures; li i d d verify and identify customers before establishing relationship with them; develop procedures relating to retention of records of transaction of their customers; establish reporting mechanisms of suspicions transactions of their customers to the relevant authorities; and h d provide training and guidance to their personnel relating to procedures and control of money laundering. laundering APT Financial Consultants Sako Mayrick, 2008 89
  90. 90. Co-operation with other nations and with regional and global bodies Tanzania co-operates with other nations and regional and global bodies in their efforts to combat money laundering and the financing of terrorism. For g g instance, in compliance with the regional efforts of the Eastern and Southern Africa Anti-Money Laundering Group ( p (ESAAMLG), Tanzania has established the ) National Multi-Disciplinary Anti-Money Laundering Committee, which reports regularly to the ESAAMLG Task Force. A Financial Intelligence Unit ( g (FIU) to ) strengthen financial and economic intelligence gathering has been established. Tanzania also co- operates with regional g p g groups such as SADC and the p East African Community (EAC) and various international organisations such as Interpol APT Financial Consultants Sako Mayrick, 2008 90
  91. 91. Vienna conventions Palermo conventions UN resolution 1373 UN Convention for Suppression of the Financing of Terrorism Other international agreements includes The SADC Protocols (including the Protocol Against Corruption the Protocol on Corruption, Combating Illicit Drugs and the Protocol on Mutual Legal Assistance in Criminal Matters); g ) APT Financial Consultants Sako Mayrick, 2008 91
  92. 92. The Memorandum of Understanding among members of the ESAAMLG; The African Union Convention on Preventing g and Combating Corruption; and The African Union Convention on the Prevention and Combating of Terrorism. APT Financial Consultants Sako Mayrick, 2008 92
  93. 93. Local legislation the Economic and Organised Crime Control Act of 1984; the Mutual Assistance in Criminal Matters Act of 1991; the Proceeds of Crime Act of 1991; the Drugs and Illicit Traffic in Drugs Act of 1995; the Extradition Act of 1965; APT Financial Consultants Sako Mayrick, 2008 93
  94. 94. Local legislation the Banking and Financial Institutions Act ,2006 the Prevention of Corruption Act of 1971; p the Prevention of Terrorism Act, 2002; the Armaments Control Act of 1991; the Ammunition Act of 1991; the Police Force Ordinance, Chapter 322; the P th Penal C d Chapter 16 and l Code, Ch t 16; d the Public Leadership Code of Ethics Act of 1995 APT Financial Consultants Sako Mayrick, 2008 94
  95. 95. p y the National Multi-Disciplinary Anti-Money y Laundering Committee; the Ministry of Finance; the BoT and banking financial institutions; the Ministry of Justice and Constitutional Affairs; the Ministry of Home Affairs; the Police Force; the PCB; h C the National Drug Control Commission; and the courts courts. APT Financial Consultants Sako Mayrick, 2008 95
  96. 96. Lack of f f force of administrative directives f Lack of specialised prosecutorial skills Corruption in legislative, judicial and enforcement activities Inter-sectoral conflict and lack of co- ordination ( Police Vs PCCB) Inordinate delays in police investigations and in court cases Lack of attention to the informal sector Resistance to anti-money laundering measures APT Financial Consultants Sako Mayrick, 2008 96
  97. 97. Lack of specialised p f p prosecutorial skills Corruption in legislative, judicial and enforcement activities Inter-sectoral conflict and lack of co- ordination ( Police Vs PCCB) I di t d l i Inordinate delays in police i li investigations and ti ti d in court cases Lack of attention to the informal sector Resistance to anti-money laundering measures APT Financial Consultants Sako Mayrick, 2008 97
  98. 98. Forensic auditing could be defined as the application of auditing skills to situations that have legal consequences. Forensic Auditing is the p g process of ggathering g and reporting on data , in a pre-defined context, for the purpose of finding facts and/or evidence in the context of fi id i h f financial /l i l /legall disputes and /or irregularities and giving preventive advice in this area APT Financial Consultants Sako Mayrick, 2008 98
  99. 99. Forensic investigation is carried out for civil or criminal cases. These can involve fraud, . Asset tracing for money laundering. Forensic accounting is undertaking a financial g g investigation in response to a particular event where the findings of the investigation may be used at evidence in court or to otherwise help d id i h i h l resolve disputes. APT Financial Consultants Sako Mayrick, 2008 99
  100. 100. Professional accounting skills Investigative skills Investigative mindset Capability to understand disputes or anticipated disputes Understand risk concerns, fraud allegations and ethical requirements g q APT Financial Consultants Sako Mayrick, 2008 100
  101. 101. Corporate governance has increased the number of forensic audit due expectation of corporate governance codes Company directors take seriously their responsibilities for the prevention and detection of fraud Government addressing risks of criminal funding of terrorist group g p APT Financial Consultants Sako Mayrick, 2008 101
  102. 102. Fraud Quantifying losses Bribes identification Intentional misstatement on f l financial statements l Creative accounting Negligence by auditor or others Insurance claims when there are disputes Contract disputes Matrimonial disputes Business sales and purchase dispute APT Financial Consultants Sako Mayrick, 2008 102
  103. 103. Terrorist financing Expert witness, owing a duty of skill and due care to those instruction him Should be objective Should be aware of court consequences Should provide independent opinion not biased to payers Sh ld confine to material matters Should fi t t i l tt Should inform client of change of opinion and reasons for it. APT Financial Consultants Sako Mayrick, 2008 103
  104. 104. Index or list of contents Brief CV Instructions Issues Documentation Chronology Technical background Opinion References Declaration APT Financial Consultants Sako Mayrick, 2008 104
  105. 105. APT Financial Consultants Sako Mayrick, 2008 105

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