0 © 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member...

1© 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.

Forensic

Advisory

Combating money laundering in the accounting professionSteve Rogerson, Senior ManagerKPMG March 4, 2010



Agenda

BackgroundFATF recommendations to accountantsProfessional bodies’ guidance for accountants regarding MLHong Kong ordinancesCustomer due diligence (CDD) and recordkeeping for accounting profession Suspicious transaction reporting (STR)Case examples



Background

Financial Action Task Force (FATF) is tasked with drawing up recommendations for combating money laundering and terrorist financing worldwideHong Kong as a FATF member is expected to implement the recommendationsTo 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



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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FATF recommendations to accountants



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)



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 entitiescompany secretarial services




CDD: FATF recommendations: 5, 6, 8 and 9Identify and verify the customer’s identity using reliable, independent source documents, data or informationIdentify the beneficial ownerObtain information on the purpose and intended nature of the business relationshipOn-going CDD on the business relationship to ensure that the transactions being conducted are consistent with the institution’s knowledge of the customerPerform enhanced CDD for higher risk categories, e.g. Politically Exposed Persons (PEP)




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 authoritiesN.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




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)




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 instanceResponsible for making disclosures to the JFIU in accordance with the ProvisionsKeep a register of all disclosures made to him internally by employeesIf staff suspect or know of any suspicious transactions, they should immediately report to the compliance officer in writing in a sealed envelope




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.





Offshore international activitiesA 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 prevalentA 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; andExtensive and unnecessary foreign travel





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




Internal Controls: FATF recommendation 15

The accounting profession should develop programmes on AML/CFT, these should include:

to establish internal policies to prevent ML/ TFensure high standards in hiring employeesongoing employee training programme




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




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




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 RecommendationsHowever, be aware that a number of jurisdictions commonly used for company formation are found on this list.

© 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.

Professional bodies’ guidance for accountants regarding ML

HKICPA Code of Ethics

Custody of clients’ assets ¶270, 460, 410professional accountants in public practice should not assume custody of client monies or other assets unless permitted to do so by lawthe holding of client assets creates self interest threats to professional behaviour / self interest threat to objectivitythey 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



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 expertiseConsultation with engagement quality control reviewerObjectivity of engagement quality control reviewer

Consideration for smaller firmsEngagement partners may, due to the size of the practice, be involved in selecting engagement quality reviewerSuitably qualified external parties may be contracted



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)



Hong Kong ordinances

Drug trafficking (Recovery of Proceeds) Ordinance (DTROP)

Organized and Serious Crimes Ordinance (OSCO)United Nations (Anti-Terrorism Measures) Ordinance

(UNATMO)



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)




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 propertyConcealing/disguising propertyDisposing/converting propertyBringing into/removing from Hong KongUsing property as collateral/security/pledge (DTROP and OSCO §§ 2, 25(3)




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 DefendantIf deal in property and had reasonable grounds to believe, even if not know or believe himself, then liable(DTROP & OSCO § 25)




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 proceedsIf believe that property used in connection with indictable offenseIf 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




Proceeds of an indictable offense

Payments or rewards received in connection with the offenseProperty devised or realized from any of the payments or rewardsAny pecuniary advantage obtained in connection with the offense

Person may deal with criminal proceeds if the principal crime was committed outside Hong KongPecuniary advantage: broad enough to include cost savings(DTROP § 4; OSCO § 2)




Reporting suspicious transactions and activitiesKnow 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 contractOffense to tip-off or disclose to any person if this would prejudice an investigation(DTROP & OSCO § 25A)



Member practices

Member should appoint a money laundering compliance officer (CO)

Officer should keep a register of all disclosuresEmployees should inform compliance officer if

knowledge/suspicion that:Property represents proceeds of an indictable offenseProperty used in connection with indictable offenseIntention to be used in connection with indictable offenseTerrorist property

Employee should inform the CO even if believe that the disclosure has been made by another person



Member practices (cont’d)

Employees disclosure to Compliance Officer: knowledge or suspicion:*Actual knowledgeShut one’s mind to the obviousDeliberately refrain from making inquiries, the content of which one might not likeKnowledge of circumstances which would indicate facts to an honest and reasonable personKnowledge of circumstances which would put an honest person on notice, and failing to make such inquiries

* Consultative Committee of Accountancy Bodies (UK, 03/2004).




Employees disclosure to Compliance Officer: knowledge or suspicion:*

Suspicion is defined as:Personal and subjectiveBuilt on an objective foundationMore than speculationLess than proof or knowledge

* Consultative Committee of Accountancy Bodies (UK, 03/2004).




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




Employees should:Report immediately if they have knowledge or suspicionReport in writingReport to engagement partner or senior member of the firmEngagement partner reports to compliance officer; or, if no CO, then to an authorized officerSeek permission from compliance officer before continuing to carry out duties and work for client




Compliance officer:Compliance officer retains only copies of initial reportWritten acknowledgement of employees’ reportsResponsible for evaluation Responsible for reporting suspected cases to JFIUEmployees 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



Customer due diligence for accounting profession (KYC)

Pre-engagement proceduresClient 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:GoogleDow 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 websiteRegulatory website



Customer due diligence for accounting profession (KYC) (cont’d)

Pre-engagement proceduresClient and Engagement Acceptance

Factors to be considered may include:Source of the prospective clientThe prospective client’s backgroundIntegrity of key management and principal owners of the entityFinancial condition of the entityIndependence and potential for real or perceived conflicts of interestThe level of risk the firm might face in serving the potential client



Customer due diligence for accounting profession (KYC) (cont’d)

Pre-engagement proceduresConflict check

To determine auditor’s independence requirementsTo identify and manage potential conflict of interest, including cross border conflicts, with the proposed engagement



Suspicious transaction reporting

Staff awarenessImportance of continuous training

Compliance generallyAML roles and responsibilities in particularCustomer and engagement acceptance processFace-to-face and non-face to face transactionsIdentification of high-risk accounts (PEPs, industries, jurisdictions, litigations, shell companies)Monitor best practices in mediaIndicia of suspicious activities



Suspicious transaction reporting (cont’d)

Indicia of suspicious activities

Large or frequent cash transaction, either deposits or withdrawals

Suspicious activity based on transaction patternAccount 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; andIncreased level of account activity on the first banking day after Hong Kong horse racing, normally Mondays and Thursdays, indicating possible illegal bookmaking.




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; orCasinos.




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.




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.




What to include on STR

Personal particulars (ID#, DOB, address, telephone #, bank account #)Details of suspicious financial activityReason 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 indicatorsAsk customer appropriate questions, without arousing suspicionsReview information already known about customer and previous transactions (KYC)Evaluate all information to decide whether to file and STR




Suspicious transaction reports: JFIUMailFax Electronic filing through Suspicious Transaction Report and Management System (STREAMS)

e-form

e-STRXML format

Internet

JFIU

e-Acknowledge/Resulte-STR

STREAM

Encrypted

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Case example



Case example

Mr. X was a senior government official of Jurisdiction A which has a major corruption problemThrough his corruption, he had a large amount of cash that he wanted to launderMr. X came to Hong Kong and asked a local accountancy firm to establish a limited company for himAfter company bank accounts were opened, substantial deposits were made for the purchase of shares and real estates in Hong KongAs a result, a total of US$10 million was laundered



Case example (cont’d)

Accountants should exercise great care to prevent politically exposed persons (PEPs) from abusing their professional services for money laundering purposesBefore forming business relationship with the client, enhanced CDD should be performed If circumstances are suspicious, they should report the suspicious transactions to JFIU

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Presenter’s contact details

Steve Rogerson

KPMG

+852 2140 2279

[email protected]

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.

© 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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