Forensic
Combating money laundering in
the accounting profession
Steve Rogerson, Senior Manager
KPMG March 4, 2010
Advisory
© 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Agenda
Background
FATF recommendations to accountants
Professional bodies’ guidance for accountants
regarding ML
Hong Kong ordinances
Customer due diligence (CDD) and recordkeeping for
accounting profession
Suspicious transaction reporting (STR)
Case examples
© 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
1
Background
Financial Action Task Force (FATF) is tasked with
drawing up recommendations for combating money
laundering and terrorist financing worldwide
Hong Kong as a FATF member is expected to
implement the recommendations
To date, this has been achieved via Hong Kong
ordinances and through professional standards and
guidelines (for accountants HKICPA)
Last review (November 2007) and Mutual Evaluation
report of FATF (June 2008) resulted in a number of
recommendations currently under consideration by
relevant Hong Kong government bodies – be prepared
for changes
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
2
Background
Designated Non-Financial Businesses and Professions (DNFBPs)
as defined by FATF are:
Lawyers
Accountants
Trust and Company Service Providers (TCSPs)
Real Estate Agents
Dealers in Precious Metals / Stones
Casinos
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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FATF recommendations to
accountants
4
FATF recommendations to accountants
Core recommendations
Customer Due Diligence (CDD)/Know Your Customer
(KYC) (Rec. 5)
Recordkeeping (Rec. 10)
Suspicious Transaction Reporting (STR) (Rec.13)
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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FATF recommendations to accountants
(cont’d)
The CDD and recordkeeping requirements apply to
DNFBPs such as accountants when they prepare for or
carry out transactions for their clients concerning the
following activities:
buying and selling of real estate;
managing of client money, securities or other assets;
management of bank, savings or securities accounts;
organisation of contributions for the creation, operation
or management of companies; or
creation, operation or management of legal persons or
arrangements, and buying and selling of business
entities
company secretarial services
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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FATF recommendations to accountants
(cont’d)
CDD: FATF recommendations: 5, 6, 8 and 9
Identify and verify the customer’s identity using
reliable, independent source documents, data or
information
Identify the beneficial owner
Obtain information on the purpose and intended
nature of the business relationship
On-going CDD on the business relationship to ensure
that the transactions being conducted are consistent
with the institution’s knowledge of the customer
Perform enhanced CDD for higher risk categories, e.g.
Politically Exposed Persons (PEP)
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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FATF recommendations to accountants
(cont’d)
Recordkeeping: FATF recommendations 10, 11
All necessary domestic or international transaction
records should be maintained for at least five (5) years
to enable compliance with information request from the
competent authorities
N.B. The Consultative Paper indicates that this will be
increased to six (6) years)
Keep records on the identification data obtained
through the CDD (e.g. HKID, passports) for at least 5
years after the business relationship is ended
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
8
FATF recommendations to accountants
(cont’d)
Suspicious transaction reporting: FATF
recommendations 13-15, 21
Accountancy practices have the obligation to report promptly their
suspicions to the Joint Financial Intelligence Unit (JFIU) if they suspect
or have reasonable grounds to suspect that the transaction involved a
criminal activity
implemented in law of HK through OSCO section 25A, (max. penalty : A
fine of HK$50,000 and imprisonment for 3 months)
Under Hong Kong law, the requirement to report suspicious transactions
should generally override any professional duty of client confidentiality
Those who report their suspicions in good faith are prohibited by law
from disclosing the fact that a STR is being made (no tipping-off)
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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FATF recommendations to accountants
(cont’d)
Suspicious transactions reporting (STR) – accounting
profession
Each practice should appoint a person of sufficient seniority
designated as a responsible money-laundering compliance officer
to whom:
disclosures should be made internally in the first instance
Responsible for making disclosures to the JFIU in accordance
with the Provisions
Keep a register of all disclosures made to him internally by
employees
If staff suspect or know of any suspicious transactions, they
should immediately report to the compliance officer in writing in a
sealed envelope
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
10
FATF recommendations to accountants
(cont’d)
Suspicious transaction “red flags” for accountants
Client has cheques inconsistent with sales (i.e., unusual payments
from unlikely sources).
Client has a history of changing bookkeepers or accountants
yearly/frequently
Company carries non-existent or satisfied debt that is continually
shown as current on financial statements.
Company is paying unusual consultant fees to offshore companies
Company records consistently reflect sales at less than cost, thus
putting the company into a loss position, but the company
continues without reasonable explanation of the continued loss.
Company is invoiced by organizations located in a country that
does not have adequate money laundering laws and is known as a
highly secretive banking and corporate tax haven.
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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FATF recommendations to accountants
(cont’d)
Suspicious transaction “red flags” for accountants
Offshore international activities
A customer who is introduced by an overseas agent, affiliate or
other company that is based in countries where the production of
drugs or drug trafficking may be prevalent
A customer who is based in Hong Kong and is seeking a lump sum
investment and offers to pay by a wire transaction or foreign
currency;
Formation of subsidiaries or branches in countries where these do
not appear necessary to the business, and/or the manipulation of
transfer prices with such subsidiaries or branches; and
Extensive and unnecessary foreign travel
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
12
FATF recommendations to accountants
(cont’d)
Suspicious transaction “red flags” for accountants
Businesses regarded as “higher risk”
Companies conducting business mainly in cash, e.g. restaurants
and casinos;
Companies with weak internal controls, particularly with regard to
segregation of duties and/or authorisation and approval of
transactions e.g. owner-managed companies;
Companies with nominee directors/shareholders, particularly where
financial, legal or other advisers provide their names as directors or
trustees, with little or no commercial involvement;
Companies with a large volume of offshore transactions;
Companies or trusts formed with no apparent commercial or other
purpose; and
Long delays in the production of company or trust accounts
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
13
FATF recommendations to accountants
(cont’d)
Internal Controls: FATF recommendation 15
The accounting profession should develop
programmes on AML/CFT, these should include:
to establish internal policies to prevent ML/ TF
ensure high standards in hiring employees
ongoing employee training programme
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
14
FATF recommendations to accountants
(cont’d)
New technology and non-face to face businesses: FATF
recommendation 8
Take measures to prevent the use of new or
developing technologies in money laundering
schemes as they may favour anonymity
Establish policies to address risks associated with
non-face to face business relationships
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
15
FATF recommendations to accountants
(cont’d)
Complex / unusual transactions: FATF recommendation
11
Pay special attention to all complex, unusual large
transactions, which have no apparent economic or
visible lawful purpose
Examine the background and purpose of such
transactions
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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FATF recommendations to accountants
(cont’d)
Special attention to parties from non-compliant
jurisdictions: FATF recommendation 21
Among a range of factors, give special attention to
business relationships and transactions with persons,
from countries which do not apply the FATF
Recommendations
However, be aware that a number of jurisdictions
commonly used for company formation are found on
this list.
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Professional bodies’ guidance for
accountants regarding ML
HKICPA Code of Ethics
Custody of clients’ assets ¶270, 460, 410
professional accountants in public practice should not assume
custody of client monies or other assets unless permitted to do so
by law
the holding of client assets creates self interest threats to
professional behaviour / self interest threat to objectivity
they should be aware of threats to compliance with the fundamental
principles through association with such assets
should consider their legal and regulatory obligations if the assets were
found to derived from illegal activities
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
Professional bodies’ guidance for
accountants regarding ML (cont’d)
Hong Kong Standard on Quality Control
Engagement quality control review (A47-A50)
Sufficient and appropriate technical expertise
Consultation with engagement quality control reviewer
Objectivity of engagement quality control reviewer
Consideration for smaller firms
Engagement partners may, due to the size of the practice, be
involved in selecting engagement quality reviewer
Suitably qualified external parties may be contracted
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Professional bodies’ guidance for
accountants regarding ML (cont’d)
Hong Kong Standard on Quality Control
Confidentiality, safe custody, integrity, accessibility
and retrievability of engagement documents (A56-59)
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Hong Kong ordinances
Drug trafficking (Recovery of Proceeds) Ordinance
(DTROP)
Organized and Serious Crimes Ordinance (OSCO)
United Nations (Anti-Terrorism Measures) Ordinance
(UNATMO)
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Hong Kong ordinances (cont’d)
Investigation and access to information
Person appears to be in possession or control of
particular material . . . must produce it to authorized
officer (DTROP §§ 2, 20-22; OSCO §3)
A person who hinders or obstructs an officer in the
execution of a search warrant: offense, HK$250,000
fins and 2 years in prison (DTROP § 22; OSCO §5, 7)
If knows or suspects an investigation is taking place,
and makes a disclosure likely to prejudice an
investigation: offense, HK$500,000 fine and 3 years in
jail (DTROP § 24)
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Hong Kong ordinances (cont’d)
Dealing in proceeds of crime
Dealing with any property knowing or having reasonable grounds
to believe that the property represents the proceeds of an
indictable offense (DTROP and OSCO §25(1))
Dealing in:
Receiving/acquiring property
Concealing/disguising property
Disposing/converting property
Bringing into/removing from Hong Kong
Using property as collateral/security/pledge (DTROP and OSCO §§ 2,
25(3)
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Hong Kong ordinances (cont’d)
Indictable offence
Any offense defined in Crimes Ordinance, other than if can be
tried summarily (Crimes Ordinance § 23A)
“Knowing”
Objective: Grounds that a common-sense, right-thinking person
would consider were sufficient to lead a person to believe that the
property was linked to a serious offence;
Subjective: Then grounds were known to the Defendant
If deal in property and had reasonable grounds to believe, even if
not know or believe himself, then liable
(DTROP & OSCO § 25)
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Hong Kong ordinances (cont’d)
Defense:
if there was an intention to disclose knowledge/suspicion, and the
delay in disclosure was reasonable
(DTROP & OSCO §§ 25(2), 25A(2))
Duty to disclose:
If believe property represents criminal proceeds
If believe that property used in connection with indictable offense
If believe that property is intended to be used criminally
(DTROP & OSCO § 25A(1))
Penalty for failure to disclose: HK$50,000 and 3 months in jail
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Hong Kong ordinances (cont’d)
Proceeds of an indictable offense
Payments or rewards received in connection with the offense
Property devised or realized from any of the payments or rewards
Any pecuniary advantage obtained in connection with the offense
Person may deal with criminal proceeds if the principal crime was
committed outside Hong Kong
Pecuniary advantage: broad enough to include cost savings
(DTROP § 4; OSCO § 2)
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Hong Kong ordinances (cont’d)
Reporting suspicious transactions and activities
Know or suspect property represents proceeds of
criminal offense must disclose, as soon as reasonable
Failure to do so: HK$50,000 and 3 months in jail
Does not commit an offense by disclosure
Disclosure not treated as breach of contract
Offense to tip-off or disclose to any person if this
would prejudice an investigation
(DTROP & OSCO § 25A)
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Member practices
Member should appoint a money laundering compliance
officer (CO)
Officer should keep a register of all disclosures
Employees should inform compliance officer if
knowledge/suspicion that:
Property represents proceeds of an indictable offense
Property used in connection with indictable offense
Intention to be used in connection with indictable offense
Terrorist property
Employee should inform the CO even if believe that the
disclosure has been made by another person
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Member practices (cont’d)
Employees disclosure to Compliance Officer: knowledge
or suspicion:*
Actual knowledge
Shut one’s mind to the obvious
Deliberately refrain from making inquiries, the content
of which one might not like
Knowledge of circumstances which would indicate
facts to an honest and reasonable person
Knowledge of circumstances which would put an
honest person on notice, and failing to make such
inquiries
* Consultative Committee of Accountancy Bodies (UK, 03/2004).
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Member practices (cont’d)
Employees disclosure to Compliance Officer: knowledge
or suspicion:*
Suspicion is defined as:
Personal and subjective
Built on an objective foundation
More than speculation
Less than proof or knowledge
* Consultative Committee of Accountancy Bodies (UK, 03/2004).
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Member practices (cont’d)
Staff should not be required to perform additional
special tasks, other than those expected as part of
their normal assignment
Employees and professionals should be alert for indicia
of money laundering, terrorist financing, and other
potential criminal offenses
Employees should be alert for irregular activities or the
possibility that client is unknowingly dealing with
property representing criminal proceeds
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Member practices (cont’d)
Employees should:
Report immediately if they have knowledge or
suspicion
Report in writing
Report to engagement partner or senior member of the
firm
Engagement partner reports to compliance officer; or,
if no CO, then to an authorized officer
Seek permission from compliance officer before
continuing to carry out duties and work for client
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Member practices (cont’d)
Compliance officer:
Compliance officer retains only copies of initial report
Written acknowledgement of employees’ reports
Responsible for evaluation
Responsible for reporting suspected cases to JFIU
Employees and compliance officer must ensure that a
disclosure must not be revealed to the client or other
person apart from engagement partner and
compliance officer
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Customer due diligence for accounting
profession (KYC)
Pre-engagement procedures
Client Background Check
To look for the prospective client’s background to see whether they
have any negative publicity or involved in any criminal activities
Reliable 3rd party sources to look for:
Google
Dow Jones Factiva (provides business and research information )
ICRIS (Hong Kong Company Registry)
TOLFIN (contains high court actions on individuals and companies)
OneSource (provides business and research information )
Entity’s own website
Regulatory website
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Customer due diligence for accounting
profession (KYC) (cont’d)
Pre-engagement procedures
Client and Engagement Acceptance
Factors to be considered may include:
Source of the prospective client
The prospective client’s background
Integrity of key management and principal owners of the entity
Financial condition of the entity
Independence and potential for real or perceived conflicts of interest
The level of risk the firm might face in serving the potential client
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Customer due diligence for accounting
profession (KYC) (cont’d)
Pre-engagement procedures
Conflict check
To determine auditor’s independence requirements
To identify and manage potential conflict of interest, including
cross border conflicts, with the proposed engagement
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Suspicious transaction reporting
Staff awareness
Importance of continuous training
Compliance generally
AML roles and responsibilities in particular
Customer and engagement acceptance process
Face-to-face and non-face to face transactions
Identification of high-risk accounts (PEPs, industries, jurisdictions,
litigations, shell companies)
Monitor best practices in media
Indicia of suspicious activities
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Suspicious transaction reporting (cont’d)
Indicia of suspicious activities
Large or frequent cash transaction, either deposits or withdrawals
Suspicious activity based on transaction pattern
Account used as a temporary repository for funds;
A period of significantly increased activity amid relatively dormant periods
"Structuring" or "smurfing", i.e. many lower value transactions conducted
when one, or a few, large transactions could be used. Seen particularly in
incoming remittances from countries with value-based transaction
reporting requirements, e.g. frequent remittances of just below A$10,000
(Australia), or US$10,000 (USA);
"U-turn" transactions, i.e. money passing from one person or company to
another, and then back to the original person or company; and
Increased level of account activity on the first banking day after Hong Kong
horse racing, normally Mondays and Thursdays, indicating possible illegal
bookmaking.
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Suspicious transaction reporting (cont’d)
Indicia of suspicious activities
Involvement of one or more of the following entities
commonly involved in money laundering:
Shelf/shell companies;
Companies registered in a known tax haven or off-shore
financial centre;.
Company Formation Agents, or Secretarial Companies,
as the authorized signatory of the bank account;
Remittance agents or money changers; or
Casinos.
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Suspicious transaction reporting (cont’d)
Indicia of suspicious activity
Transactions involving currencies, countries or nationals commonly
associated with international crime or drug trafficking, or identified as
having serious deficiencies in their anti-money laundering regimes
Countries or places which either do not or insufficiently apply the
Financial Action Task Force (FATF) Recommendations
Customer refusing, or unwilling, to provide an explanation of financial
activity, or providing false explanations
Activity not commensurate with that expected from the customer
considering information already known about the customer and his
previous financial activity. For personal accounts, the customer’s age,
occupation, residential address, general appearance, type and level of
previous financial activity will be considered. For company accounts,
factors such as type and level of activity ought to be considered.
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Suspicious transaction reporting (cont’d)
Indicia of suspicious activity
Countries or nationals of countries commonly associated with
terrorist activities or persons or organizations designated as
terrorists or their associates identified on the latest consolidated
list pursuant to the United Nations Security Council Resolutions
1267 (1999), 1333 (2000) and 1390 (2002)
Politically Exposed Persons (PEPs)
PEPs are individuals holding or having held important positions
in government or the public sector, as well as their close family,
relatives and associates. It has been alleged that some PEPs in
some overseas countries are involved in corruption and abuse of
public funds.
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Suspicious transaction reporting (cont’d)
What to include on STR
Personal particulars (ID#, DOB, address, telephone #, bank account #)
Details of suspicious financial activity
Reason why transaction is suspicious
Explanation, if any, given by the person about the transaction
How to evaluate whether to file an STR
Screen account for suspicious indicators
Ask customer appropriate questions, without arousing suspicions
Review information already known about customer and previous transactions
(KYC)
Evaluate all information to decide whether to file and STR
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Suspicious transaction reporting (cont’d)
Suspicious transaction reports: JFIU
Mail
Fax
Electronic filing through Suspicious Transaction Report and Management System
(STREAMS)
e-STR
e-Acknowledge/Result
STREAM
JFIU
Encrypted
Internet
e-form
e-STR
XML format
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Case example
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Case example
Mr. X was a senior government official of Jurisdiction
A which has a major corruption problem
Through his corruption, he had a large amount of cash
that he wanted to launder
Mr. X came to Hong Kong and asked a local
accountancy firm to establish a limited company for
him
After company bank accounts were opened,
substantial deposits were made for the purchase of
shares and real estates in Hong Kong
As a result, a total of US$10 million was laundered
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KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Case example (cont’d)
Accountants should exercise great care to prevent
politically exposed persons (PEPs) from abusing their
professional services for money laundering purposes
Before forming business relationship with the client,
enhanced CDD should be performed
If circumstances are suspicious, they should report
the suspicious transactions to JFIU
© 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.
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Presenter’s contact details
Steve Rogerson
KPMG
+852 2140 2279
steve.rogerson@kpmg.com.hk
www.kpmg.com.hk
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we
endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will
continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular
situation.
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