CHAPTER 23
FRAUD AND MONEY LAUNDERING
FRAUD
Definition of fraud
Fraud- an act of deception intended to secure personal gain for the person
committing the fraudulent act or to cause loss to someone else.
Error is unintended
FRAUD
Types of fraud
Asset misappropriation-Taking money or other assets from the business
dishonestly, such as making false expense claims.
Misrepresentation-Making false statements to deceive and disguise the truth.
In particular, it may involve preparing misleading financial statements to deceive
shareholders, lenders or regulators.
FRAUD
Asset misappropriation
1. Theft
2. Overstating expense
3. Fictitious customers
4. Collusion with customer/supplier
5. Teeming and lading
FRAUD
Implications of fraud
a. Loss of shareholder confidence
b. Loss of asset
c. Financial difficulties
d. Collapse of company
e. Fines by tax and other authorities
Signs of potential fraud
a. Secretive behaviour
b. Expensive lifestyle
c. No segregation of duties
d. Unusual transactions
e. Poor morale
f. Working long hours
FRAUD
Minimising fraud
The organisation has employed one or more dishonest individuals
Internal controls to prevent fraud are weak because opportunities exist to
ignore or avoid those controls
Internal controls to detect fraud, and measures to punish fraud when
discovered, are weak or ineffective.
When do fraud occur
Dishonesty
Motivation
Opportunity
FRAUD
Responsibility of the management
The management is responsible for the design and of the internal control system
and those charged with governance are responsible for its effectiveness.
Whistleblower
An individual that reports a suspicion or case of financial crime or other
irregularities.
FRAUD
Money laundering
Activities intended to conceal the origins of proceeds from criminal activities.
Money laundering
Placement- introduction of
money earned through crime
into the laundering system.
Deposit criminal proceeds in
legitimate bank accounts, or
buy chips at casino’s.
Layering- Activities and transactions
conceal the money’s source, making it
difficult for investigators to trace what
has happened to it. Moving money
between multiple bank accounts,
including overseas banks.
Integration- Using
laundered money for a
legitimate purpose.
Buying a car, property,
jewellery etc.
FRAUD
Other money laundering offenses
Tipping off- This happens when one person informs another that the other person
is being investigated for suspicion of money laundering..
Failure to report-Most countries have laws or regulations for dealing with
money laundering. Failure to report suspicions of money laundering is an offence
for individuals with regulatory responsibility for anti-money laundering
procedures.
Failure to report the offence has a maximum penalty of 5 years of imprisonment/
or fine.
Tipping off – 2 years imprisonment
Money laundering – maximum 14 years of imprisonment
ANTI-MONEY LAUNDERING
Financial action task force (FATF)
The international anti-money laundering initiative has been led by an inter-
governmental body, the Financial Action Task Force or FATF.
Detecting and preventing money laundering
Due diligence
Dealing with large transaction
Staff training
Retaining records
Handling potential tipping off offence
HANDLING CLIENT MONEY
Professional firms such as accountants or lawyers sometimes act on behalf of a
client, for example, to assist them with investing in the stock market. To carry out
these tasks for clients, the firm will need some money from the clients to pay for
what they want.
Effective policies and procedures must be implemented for handling client
money:
1. Reduce the risk of involvement in financial crime (fraud and money
laundering)
2. Ensure client funds are not misspent or misappropriated.
3. Ensure client funds are correctly accounted for.