One of the biggest challenges in the globalization of the economy is monitoring and preventing illicit activities such as money laundering. The breakdown of various sectors, such as the monetary and banking systems, the loss of public trust in the financial system, and the difficulty of estimating GDP in the impacted nations, are all affected by this phenomenon.
According to the United Nations Office on Drugs and Crime (UNODC), money laundering is defined as “the conversion or transfer of property, knowing that such property is derived from any offense(s), for the purpose of concealing or disguising the illicit origin of the property, or of assisting any person who is involved in such offense(s) to evade the legal consequences of his actions,”
The process of money laundering is usually done by shifting money from one person or entity to another through complicated transactions that make it impossible for outsiders to figure out the origin of money. This procedure is generally used to conceal illegal gains from law authorities or tax officials. Money laundering is one of the various types of financial misconduct that involve some kind of dishonest activity, such as extortion, counterfeiting, or tax fraud.
Money Laundering Phases
Money laundering is the practice of converting illegally obtained funds into lawful funds or other assets. It consists of three phases:
Pouring corrupt money in modest amounts into the financial system is a process of bringing corrupt money into the market, which is considered the first phase of money laundering known as placement.
The second phase of layering is a complicated network of transactions used to bring money into the financial system, which is often done using offshore methods. Its goal is to make many financial transactions by transferring funds around to confuse people and make it more difficult to track down its original source and ownership.
The illegal money is now incorporated into the economy in the third phase of money laundering, known as integration. The money is subsequently returned to the fraudsters via a seemingly legal source. The illicit proceeds, which were first put as cash and then stacked through a series of financial transactions, are now completely integrated into the monetary system and can be exploited for any reason.
In reality, hardly all money laundering crimes go through all the above three phases. Some of these phases will be combined or repeated multiple times. For example, money earned from the sale of illicit substances may be separated into small amounts, deposited by “carriers,” and then transferred to a fake business as payment for services rendered. The placement and layering stages are completed in single process in this scenario. The overall quantity of money that goes through the laundering phase each year is impossible to quantify due to the deceptive and hidden nature of money laundering. However, the UNODC estimates that money laundering accounts for 2–5% of worldwide GDP, or $800 billion to $2 trillion in current US dollars, in a single year.
Role of Auditors
Auditors must be very cautious when it comes to money laundering concerns, especially in organizations that are mostly cash-based because the potential for money laundering in such businesses is extensive. For auditors, detecting non-compliance with rules and regulations can be challenging. As a result, the auditor must maintain a good degree of professional skepticism and be aware that other audit processes may bring instances of non-compliance or suspected non-compliance with laws and regulations to the auditor’s notice. Such procedures might include:
- Reviewing board meeting minutes
- Conducting meaningful checks on transaction types, account balances, and disclosures
- Inquire with management and/or legal counsel about any lawsuits or claims filed against the company
Money laundering is a punishable crime in many nations, and if an accountant or auditor uncovers a situation that could lead to money laundering, the accountant or auditor must report the suspicions to a compliance officer, who is then responsible for reporting them to an enforcement agency. It is not essential for the auditor to get all of the facts or to be satisfied that an offense has happened beyond a reasonable doubt. The auditor merely needs to make sure that their suspicions are legitimate and that they have enough proof to establish that the claims are valid. Because of the nature of auditing, which provides a comprehensive overview of the financial operations and analyses of individual business entity transactions, it can help discover and mitigate money laundering, theft, and other illegal activity.
Signs to Watch out
Even though it is difficult to detect money laundering in practice, several signs that the organization being audited could be committing fraud tend to involve:
- A sophisticated corporate structure where complexity does not appear to be required
- When significant quantities of money are exchanged in an unusual way
- If there is limited information or explanations, or where explanations are inadequate
- Transactions happened outside the ordinary course of business
- In the normal conduct of business, transactions happen with little financial sense.
Financial institutions throughout the world are finding it tough to enforce the new legislation and establish complete compliance systems as the regulatory framework evolves and becomes more complex. Nevertheless, auditors’ obligations to combat financial misconduct and money laundering are critical as a social responsibility in this business climate.
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