Identify and evaluate the interaction between fraud and money laundering, including a discussion that details how fraudsters could seek to move the proceeds of crime.
Use examples to support your analysis. 20 marks
1. Money laundering occurs when criminals hide the original ownership, control and source of criminal proceeds to give the impression that the original source is legal. Fraud is an offence committed by false representation, failing to disclose information and abuse of position, each of which requires concealment with intent to make a gain or cause a loss resulting in proceeds of crime. A person commits an offence if these proceeds are concealed, converted, transferred, disguised, removed from the UK, arranged, acquired, used or found to be in possession. Money laundering has three stages placement, integration and layering. However with fraud the money is already in the system and it goes to integration and layering as fraudsters need to hide the source and re – introduce the funds into the legal system. Fraud is a predicate offense for money laundering. Money laundering questions the source of funds whereas fraud is about the existence.
Fraudsters can launder proceeds in various ways including use of shell companies, money mules, payment processors and the Hawala system as discussed below.
A loan was created between two shell companies and guaranteed by a third party; a Moldovan citizen. Although no money was exchanged the loan subsequently defaulted and Moldovian Courts ordered the guarantor to repay. This repayment would be paid via an intermediary bank called ‘’Moldindconbank’’ then to the account held by the lending company at the Latvian based bank Trasta Komercbanka. The money is now considered legal and ready for use now that it has entered the European Union via Latvia. $ 20 billion was laundered to 5,140 companies associated with 732 banks across 96 countries from 2010 to 2014 and deemed the ‘’Russian Laundromat’’. The money laundering was effective as the use of the shell companies allowed the Beneficial Ownership to be hidden making it difficult for financial institutions to identify unusual transactions and the conversion of illegal funds to appear legitimate.
Fraudsters use phishing to obtain bank and credit card details which are used to steal money and make purchases. Money mules in the same country as the victim are used to accept money into their account for a commission. The money will then be transferred to the bank accounts of the fraudsters in amounts not to be detected by the banks anti-money laundering (AML) controls. Money mules are an effective in money laundering the proceeds of crime for online fraud. However the use of artificial intelligence to analyse usage patterns means that the money mules will be identified faster. In 2018 Lloyds bank identified and froze £1m in such funds over four months.
Payment processors can be used to lauder funds derived from fraud. For instance PacNet processed cheques relating to mail fraud (letters sent to people telling them they won the lottery but had to pay money to claim the winnings). PacNet took a commission and transferred the remaining to the fraudster. This scheme lasted 20 years and was successful due to the fact that payment processors can open bank accounts to facilitate the flow of money without the need to details the clients linked to the funds. The control of the funds are hidden and re – introduced to appear that they are legally derived.
The Hawala system can be used to launder proceeds from fraud. Value is transferred via a series of transactions between individuals with legitimate business activities for a commission. It is an effective mechanism as the lack of formal records makes it difficult to trace and funds appear to be related to genuine business transactions.
Fraud and money laundering are closely collected as fraudulently money is integrated and layered into the system then emerging as legal funds.
The harm that fraud can cause to charities’ good work, their beneficiaries and reputation, as well as to public trust and confidence in the sector, can be immense. During financial year 2015/16 over 2,200 serious incidents were reported to the commission by charities, of which
178 were classified as fraud.
www.gov.uk
Identify and examine how charities could utilise fraud prevention related systems and controls to reduce the risks of becoming a victim of fraud. Use examples within your response to support the analysis presented. 20 marks
THIS ONE NEEDS TO BE CUT DOWN BY ABOUT 125 WORDS
2. Charities can reduce their losses to fraud (12 £2.3billion) by embedding a fraud culture, implementing financial controls, pre- employment screening and due diligence before issuing grants.
A fraud prevention culture includes the tone from the top, training, a Fraud Policy, procedures and whistleblowing. Management must display behaviours they expect staff to follow and communicate that the charity will not tolerate fraud and will prosecute as necessary. Staff should be encouraged to speak up if fraud is suspected and assured that whistle-blowers will be protected. Values of the charity can be incorporated into the Code of Conduct which staff should confirm understanding as noted in the Oxfam Employee Code of Conduct. The Fraud Policy needs to support the zero tolerance approach as well as key controls for prevention, detection and investigation with a link to the Whistle- blowing policy. The latter informs staff how to report suspected fraud. Training on fraud should be provided as staff is more engaged and compliant when they have a better understanding. This can include e- learning, scenarios and good practice.
Financial controls are important as 50% relate to procurement. Segregation of duties between creating invoices, paying invoices and receipt of goods could prevent fraudulent invoices and suppliers as well as unauthorised expenses. Payments should be approved by someone independent of these activities. Authorisation limits would restrict approval amounts and higher value items would need more than one approval. Review of personal expenditure would deter individuals from fraud. An employee stole £300K from a charity by inserting his bank details into the invoice as he had full control of invoice management and processing.
10 Fraud relating to payroll is 43% and must have 8controls for approvals of joiners, leavers, overtime, sickness pay remuneration and terms of employment. Segregation of duties between creating staff and paying staff would prevent ghost staff being created and paid. Staff and payroll records should be maintained separately and reconciled to identify ghost staff or unauthorised payments. An employee created false employees and paid over £350K into her bank account.
8 Individuals commit grant fraud by acquiring funds from charities for their own use instead of a cause. This can be prevented by implementing procedures for review and approval of grant applications and a due diligence process to check the applicants and purpose. A charity lost around £500K in grant fraud.
8 Pre- employment screening, gaps in employment, criminal and credit checks can identify concerns around integrity and indicate individuals that should not be hired as they are likely to commit fraud. For instance 15a previous criminal record can indicate repeat behaviour. Checks should be ongoing during employment. Stephen Ashton stole more than £2.5m and he had a prior conviction for fraud.
8Phishing a type of online fraud is used to steal bank details. Staff need to know how identify and report phishing emails. The latest spyware and anti-virus should be used on all devices and passwords should comply with industry standard. It is important to reconcile bank and credit card statements regularly. One in five charities identified a cyber breach in a 12 month period.
These systems and controls will need to be appropriate for the size of the charity. Small charities may be unable to have sufficient segregation of duties and management will need to undertake more review activity. Larger charities can benefit from having a fraud prevention team dedicated to the fraud strategy such as Oxfam.
Question 3
Identify and evaluate the key methodologies that could be utilised by a regulated firm to embed an effective financial crime prevention (FCP) culture. As part of your analysis, discuss the benefits of embedding an effective FCP culture.
20 marks – this is too short and has to be increased BY 300 WORDS
3 . Culture is defined as the typical, habitual behaviours and mind-sets that characterise a particular organisation. Embedding a Financial Crime Prevention (FCP) culture requires tone from top, policies, procedures, training and recruitment of the right staff. Embedding a culture requires effective communication from the top, awareness of the indicators of financial crime, training, FCP policy, robust hiring practices, an understanding of whistleblowing procedures as well as an effective monitoring programme.
15The FCP culture has to be driven from the leadership cascaded via management so that staff can follow the correct behaviours. Communication from the top should include a zero tolerance approach, reporting of breaches or suspicious behaviour and protection of whistle-blowers. Also prevention is the responsibility of all staff. 15It was noted that while Enron had systems and controls in place but the culture encouraged greed motived by bonuses which this led to management fraud.
In banks policies, procedures and committees for Anti money laundering (AML), Fraud and sanctions set out the appetite, indicators and controls for FCP. For instance, Lloyds Banking Group the Code of Business Responsibility sets out the firms views on FCP which are ‘’commitment to deter, detect and prevent all aspects of financial crime’’ and ‘’zero appetite for circumvention of our fraud and financial crime policies’’.
14Training on FCP communicates the relevance and importance of FCP and this results in a better attitude and compliance. 15Non-compliance and failures are associated with lack of understanding and awareness. In a bank such training can include mandatory e- learning with scenarios, email bulletins and intranet updates.
Personal objectives can include compliance with FCP responsibilities.
15Hiring staff with characteristics that are aligned to the company values on FCP is useful in embedding culture. 15Checking criminal records, references, credit checks can highlight employees that are more likely to engage in FCP. Understanding of motivators and personality types which can indicate if they are likely to partake in internal crimes. ENRON EXAMPLE
15Effective FCP culture would increase employee awareness and compliance and reduce failings, fines and personal liabilities. This would build trust with regulators, clients, investors and top talent. Public trust and a good reputation results in greater staff loyalty and motivation. This would encourage more clients and investors which would increase profits for the business. [example]
Question 4
Explain the concept of insider dealing. Use examples or case studies to support your analysis.
10 marks
(a) in relation to qualifying investments, or related investments, which are not commodity derivatives, inside information is information of a precise nature which:
1. (i) is not generally available,
1. (ii) relates, directly or indirectly, to one or more issuers of the qualifying investments or to one or more of the qualifying investments, and
1. (iii) would, if generally available, be likely to have a significant effect on the price of the qualifying investments or on the price of related investments.
4. Insider dealing is an unfair advantage obtained from using inside information. 24Inside information is precise, not generally available, relates to an investment directly or indirectly but would have an significant effect on the price if it were to be made public.
(price sensitive and not publically available, but if public would impact price of securities).This allows the insider to make a profit or avoid a loss. This is an offence when this information is used to deal open courage another to deal or disclosed to someone else (outside normal duties) resulting in a fine and up to seven years in prison.
In 2001 Martha Stewart used inside information to sell shares in ImClone. She was advised by someone prior to the public announcement that the FDA was not going to approve the primary product. Knowing that this information was going to cause the share price to fall Martha sold her shares ahead of the announcement and avoided around $46k in losses. The share price fell two days after her sale. It is noted that the use of inside information gives the insider an unfair advantage over others in the market place. Also the buyer would not have bought at the higher price from Martha had they known the price would fall in two days which is effectively stealing from the buyer.
According to the law of economics when insiders sell knowing the price will fall they put more shares onto the market place therefore supply increases and price falls. When the non-insiders still bear the inherent risk of trading compared to the insiders it is possible that they can leave lose trust in markets and leave reducing market confidence and the number of market participants. If there are less participants it will mean less liquidity and capital becomes more expensive.
24Howerver the advantage of insider trading is that it causes information to be more public quicker and prices are more accurate but the imbalance of information does not outweigh the disadvantages of insider trading.
Question 5
Choose one of the following:
• Interpol
• International Monetary Fund (IMF).
Provide an outline of its key objectives, how it operates in practical terms and an evaluation regarding its effectiveness as part of the overall prevention of financial crimes from the UK’s viewpoint.
10 marks THIS HAS TO CUT BY ABOUT 25 WORDS
PREVENTION OF FC
5. Interpol is the largest international police organisation with 194 member countries with the Interpol is the largest international police organisation with 194 member countries with the following objectives :
– To ensure and promote the widest possible mutual assistance between all criminal police authorities within the limits of the laws existing in the different countries and in the spirit of the ‘Universal Declaration of Human Rights’’.
– To establish and develop all institutions likely to contribute effectively to the prevention and suppression of ordinary law crimes.
Interpol uses a number of mechanisms to share knowledge and collaborate with police globally to fight crime. A number of databases accessible globally hold information on Notices, fingerprints, DNA profiles, travel documents, stolen assets firearms and organised criminal networks. This provides police with information on the identification of criminals such as drug traffickers, human trafficking and organised crime. In 2017 the number of queries was 146 times per second leading to 1 million hits.
27Notices are useful as they increase global awareness of cases, criminals and victims leading to more success rates. These can be issued when individuals are wanted for fraud or tax evasion and alerting the global police. For example the Red Notice assists in location of criminals wanted for arrest as noted in the arrest of Aslam Masood for money laundering and fake accounts in 2018.
27In addition Interpol provides support to member countries in the event of an emergency by sending incident response teams. New technology and threats are always emerging hence Interpol has an innovation centre looking at the latest technology and methods to detect, prevent and investigate crimes.
27Cybercrime and counterfeiting are other areas of focus. In 2017 Interpol participated in a conference reviewing trends in cybercrime and supported a project relating to detecting when block chain is being used in money laundering. In 2016 Interpol worked with member Nigerian Economic Crime Commission to arrest the head of a criminal responsible for email fraud of up to 60m USD.
Interpol
Question 6
Identify and assess the key responsibilities that the financial crime prevention (FCP) department would hold to detect and prevent fraudulent activity. HAS TO CUT BY ABOUT 15 WORDS
10 marks
6. The FCP team shapes the overall strategy, framework and culture to protect customers and the firm from fraud. FCP has key responsibilities to detect and prevent fraud includes documentation, implementation and communication of a Fraud Policy as well as monitoring compliance. These will detail the zero tolerance approach to fraud, roles and responsibilities, detective and prevention controls, how to identify and report fraud as well as investigation procedures.
25FCP team will have to oversee compliance with the policy and review management information. This data will include will include the number of breaches, instances of fraud, cost of fraud, root causes and remedial actions. Management will maintain the relationship with the Board and governance forums to ensure that this data as well as key challenges and emerging risks are escalated and that fraud is given sufficient resource and visibility.
25The FCP team will need to roll out training to staff on the policy, fraud awareness, detection, investigation and reporting. This is important as staff comply when they are educated on the topic. Training on the Whistleblowing policy is vital as this is the 14key detection control to detect internal fraud. This also includes training and educating customers on fraud so they can protect themselves from becoming victims.
The FCP team will also provide advice to staff and clients where needed.
25Some controls are operated by the FCP team such as the review and investigation (complex cases) of suspicious transactions. For complex cases the team will need to liaise with legal. Another control includes review of exception reports to highlight certain unusual account transactions which can indicate fraud.
25The team also analyse fraud data and regulatory and industry updates to identify trends and threats which will inform the control framework to ensure the firm remains complaint. This information is also communicated to the business, regulatory and technology to ensure that the infrastructure remains up to date to ensure that the firm and its customers are protected from fraud. EXAMPLE OF
ANALYSES…
CONCLUDE
Question 7
Describe some of the typology characteristics associated with management fraud. Highlight some of the internal and external risks it presents to a business and recommended measures to mitigate the risks identified.
10 marks HAS TO CUT BY 30 WORDS
7. 15Asset misappropriation and misrepresenting financial statements are two types of management fraud designed to give the impression that the company is performing better than actual. The Enron case will be used to highlight characteristics of this type of fraud. Management fraud tends to involve large organisations, significant sums of money and complex accounting structures. 15Enron was the seventh largest firm in the US with 27 billion USD of liabilities which were hidden in several complex special purpose vehicles instead of on the balance sheet which would highlight the poor performance of the company. There was wrongful non-disclosure of these vehicles. This artificial state attracted investors and loans and high management bonuses.
15Management is motivated by ego, usually autocratic instilling fear and values of greed into staff as shown by Jeff Skilling of Enron. There is belief that they would not caught or prosecuted. The most effective tool to detect this type of fraud is whistleblowing as noted in Enron. Controls are not effective in detection as they tend to be overridden by management.
15Eventually management fraud results in financial difficulty, fall in share price and even bankruptcy as seen in Enron. Internal risks include low staff morale, reputational risk, and value of staff retirement funds linked to the company share price.15 External risks include reputational loss, creditors not being paid, loss to investors directly or via funds. Audit firm Arthur Anderson contributed to the Enron scandal which led to job losses and closure of the firm.
15Mitigants includes ensuring responsible leadership that communicates accountability, transparency, ethics, zero tolerance for fraud which are linked to performance objectives, strong financial controls, and a whistleblowing policy.15 It is also important to ensure that there is an effective board in place together with recruits that display company values.15 Enron hired risk takers. 15
After the Enron scandal the Sarbanes Oxley standards were introduce to ensure that there are robust financial controls in place.
2019-2-6-1549491729