Question

A Mutual Fund Company (“the Company”) has engaged your firm to conduct their internal audit services. All of the employees of the company are skilled investment managers and administrators. They are also very well paid compared to others in the industry. Upon reviewing the documents you found out that the CEO of the Company had formed a company which offered similar business products and services but had been fined by the Securities Commission for failure to file its statutory returns in a timely manner. You have also found out, from your search on the internet, that a company with a similar name is listed under the fraud watch-list of the Commission. As time is of the essence, you have contacted the HR Department of the company requesting a resume of the CEO. They advised that they could not locate it and that he was on vacation at that time. If have also attempted to google the name of this persons but you cannot locate him You also realize that the company did not file their audited financials from 2018. So you contacted the previous accounting firm who were not available to provide any feedback on the client company and the reasons why the accounts were not submitted to the regulator. You complete your review by cross checking the picture of the office with On a final attempt to confirm the information, you cross check the picture of the offices provided with the google maps and find out that there is another structure on that location and it is not the Fund Company

a. What are the red flags identified which might indicate money laundering activity and/or terrorist financing in this case?

b. What are the risks and the potential threats that the accounting firm may be faced with in this situation?

c. What KYC/Due Diligence work could the accounting firm have carried out and when?

Answer 1

A) Red flag activity in the case

• Company had formed a company which offered similar business products and services
• Unusual transactions or activity compared to their normal dealings.
• Unjustified large cash deposits or constantly large balances.
• The use of large amounts of cash
• Unwillingness or avoidance of providing information about their business. This include CEO information.
• Inconsistent information such as unverified documents.
• Complex financial transactions that are designed to conceal.

B) The risk that company can faced:-

Legal risks

Financial organisations may become subject to lawsuits resulting from their failure to observe mandatory KYC/AML standards or from the failure to practice adequate due diligence. Consequently, the financial organisation can, for example, suffers fines, criminal liabilities and special penalties imposed by supervisors. A court case involving the financial organisation may have far greater cost implications for its business than just the legal costs. The organisation will be unable to protect itself effectively from such legal risks if it does not engage in due diligence in identifying their customers and understanding their business

Criminal risks

There is a risk of criminal liability in case the financial organisation fails to make enquiries or report his suspicious in circumstances when he ought to have known that his services were being used to facilitate the retention or to conceal the proceeds of criminal conduct. In well regulated countries, involvement in money laundering is punishable by fines and imprisonment for individuals, as well as the business concerned and its management.

Civil Risks

There is a risk of civil liability in certain circumstances. The Organisation may be held liable and ordered to pay compensation to the victims of a breach of trust, fiduciary duty or other fraud if they assist the perpetrator by laundering the proceeds of the fraud in circumstances where it can be established that they has the relevant knowledge. Under the principle of constructive trust, it might be possible for victims to sue the financial organisation who handled their money which have resulted in the loss, if it can be shown that the financial organisation has failed to institute and maintain proper deterrence procedures not only against money laundering, but also against fraud.

Regulatory risks

Regulatory risks are the negative consequences that financial services institutions are likely to face if they don’t comply with regulatory/legislative norms meant to counter money laundering activities. There is a risk that the regulatory authority will impose a sanction, either upon the financial organisation or one of its officers, for failing to comply with the regulatory standards applicable in the financial services sector. A variety of different forms of sanction can be applied, including:

• The imposition of conditions upon a license. Conditions can be in a variety of different forms, e.g. removal of particular officer or employee, implementation of remedial action;
• Monetary penalties;
• Withdrawal of a licence.

Financial organisations face the risk of possible enforcement action against them, by the competent authority, if determine that they had:

• Failed to take reasonable care to establish and maintain effective systems and controls to offset the risk that criminals might use the organisation to launder money;
• Failed to check that employees understood the anti-money laundering training they were receiving;
• Failed to ensure that staff understood their AML responsibilities for the recognition and reporting of suspicions transactions/activities.

C)Accounting firm must have carried out their due diligence measures prior to establishing a business relationship to ensure the employees matches their risk profile and isn't using a fake identity.