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Keeping your hands clean
By Eric Lavoie , Guylaine Leclerc
New money-laundering rules now cover a variety of businesses where CAs work - with stiff penalties for noncompliance.
Here's a time-honoured recipe from the crookbook: Combine one bent lawyer with one opportunistic banker. Fold in one accountant who looks the other way. Blend well. Of course, that's a money-laundering concoction that most of us would never attempt. Nevertheless, it was once a foolproof formula for profiteering success. But Canada's new Proceeds of Crime (Money Laundering) Act, or Bill C-22, has come along to clean up the kitchen - and it's a bill that accountants should embrace.
For many years, accountants, lawyers and bankers were said to be the essential players in any money-laundering scheme. Of those, only the bankers were regulated. But criminals are no longer laundering their profits just as cash. They are devising ever more complicated ways to hide their illicit sources of income: money orders, traveler's cheques, wire transfers, certified cheques and various securities such as stocks, bonds, debentures and treasury bills. Therefore, they no longer concentrate on using just banks, credit unions, casinos or currency-exchange businesses as favourite mediums for laundering; add real estate agents, life insurance companies, trust and loan companies, cheque-cashing companies, securities brokers, investment planners and financial counselors.
In June 2000, Bill C-22 was proclaimed into law (making Canada one of the last industrialized countries to establish adequate measures to combat money laundering), and it has serious implications for all of those organizations and others - CA firms among them. The regulations regard-ing its application, which are expected to come into effect this month, now require these organizations to establish prevention and detection procedures for suspicious transactions. If they do not comply, they and their employees risk severe penalties in the form of fines of up to $2 million and/or imprisonment for up to five years.
"Um, I picked it off a money tree"
The purpose of a money-laundering transaction is to cover illicit funds with a cloak of legitimacy. Such transactions are usually associated with drug trafficking because of the huge amounts of cash that trade generates. That's where the banks come in. Though the conventional wisdom is that the advent of e-money may trigger a decline in the use of banking services, there's at least one reason banks are sure to remain in business: illicit drugs. These are exchanged for hard cash on the street and criminal organizations simply must devise creative ways of moving these funds through the banking system.
Then there's the other traditional cog in the money-laundering wheel: the law firms. The lawyer is responsible for setting up the legal structure required and for preparing legal and other instruments - all under the sacrosanct seal of solicitor-client privilege, which guarantees that any discussion or correspondence between the two will never be disclosed, even in court.
Lawyers are often asked to prepare the contracts needed to legitimize business transactions. Here in Canada, we witnessed one high-profile case in which a Montreal judge, Robert Flahiff, was convicted of money laundering. Over a two-and-a-half year period that ended in 1989, Flahiff, who was a lawyer at the time, had exported and repatriated more than $1.5 million through a series of transactions designed to hide the origin of the funds: a drug dealer's sale of illicit drugs.
Now, traditionally, the accountant's role in such funny business has been to make it possible for criminals to set up exceedingly complex financial models. Whether CAs, CGAs or CMAs, they may unknowingly be manipulated into recycling funds, or insidiously be led to actively collaborate with criminal organizations. Such organizations look for accountants who have the credibility they need to legitimize their proceeds and ultimately enjoy the fruits of their illegal activities. The signature of a reputable accounting firm accompanying a company's financial statements also inspires faith in the legitimacy of the racket's business activities.
So in the case involving Robert Flahiff, then-Revenue Canada determined that the drug dealer involved owed the government $1.3 million in income tax. A CA was engaged to participate in negotiations with Revenue Canada, and the various players decided to keep him in the dark about the source of the funds. When the accountant asked the drug dealer to explain where the money had come from, he claimed that an anonymous donor had generously deposited it in a trust fund to reward him for saving his life.
The CA had conveyed to his client that he felt this "tax" engagement was unusual and exceptional. When he asked the lawyer about the mysterious source of the money, the circumstances surrounding the transactions and the legal instruments themselves, he replied: "That's common practice in law." He added that "we lawyers see a lot of unusual things." Although the CA had already noted the unusual nature of the case, and had eventually been made aware of the drug-trafficking charges against his client, he went ahead and prepared the notice of objection for Revenue Canada. The CA did not dissociate himself from the case until several years later, when he was informed of his client's detention.
Under the new law, accountants need to be careful not to be considered accomplices under the concept of "wilful blindness," which is very close to actual knowledge. This is said to occur when a person prefers to remain ignorant despite having well-founded suspicions that something is amiss. Accordingly, the refusal of a CA to investigate or ask relevant questions because he or she suspects the existence of an illegal or dishonest situation can be considered an act of complicity.
Would the accountant in the Flahiff case have been seen to be compliant had the new legislation been in place at the time? That's anybody's guess, since no court judgments have yet been handed down to set a precedent under the new law. But accountants who play with fire may have to live with the possibility of getting burned.
Essential: suspicious minds
What can accounting firms do to comply with the law? The new act specifically refers to professional accountants, who are subject to its provisions when they act or give instructions on behalf of a third party or when they receive professional fees for the following transactions: (1) receiving or making payments; (2) buying or selling securities, real property, business identities or assets; and (3) transferring funds or securities. The proposed regulation specifically states that it doesn't apply to audit engagements.
One important aspect of the act is that it requires CA firms to adopt compliance programs. Although many of the act's sections do not apply to accountants, the new legislation does create some new responsibilities for them: they are now required to disclose substantial cash transactions, verify their clients' identities and maintain a record of each transaction.
CAs will also have to identify and report any suspicious transaction when they carry out transactions for third parties, irrespective of the amount of money involved. In order to detect suspicious transactions, CAs should be sufficiently aware of potential money-laundering situations, have good knowledge of their clients, and be cognizant of certain factors that could raise suspicions. The analysis of a suspicion should be based on a reasonable assessment of relevant factors - particularly, knowledge of the client's business, of its financial background and environment, and of the client's behaviour. The provisional guidelines provide accountants with indicators specific to their area of practice that should be taken into account when they perform certain activities on behalf of their clients.
These indicators include clients who seem to live above their means, those who do not seem to know where their files are located, or shareholder loans that appear to be incompatible with the client's business. In short, careful attention should be paid to any peculiarity or unusual fact that is inconsistent with the client's business, normal course of activities or relevant industry standards.
Accordingly, as described in the provisional guidelines, CA firms should develop training programs to ensure that their employees receive a minimum of continuing education about recycling criminal proceeds and about identifying suspicious transactions.
The finance function
CAs in industry also need to be aware of the new regulations. In response to criminal organizations stretching their talons to embrace a wider variety of organizations - real estate agents and life insurance companies, for example - legislators ensured the new act governs these and others. All are places where a CA may be employed as controller. So CAs in a variety of workplaces can play a crucial role. But what risks do legitimate businesses actually face? What should they be concerned about?
Here's one example of how a money-laundering scheme might work. (For more examples of the risks an organization faces, see "Risky business," below.) In Montreal, a lobbying group called Alliance Quebec was used to launder illicit funds in 1991. One of the organization's permanent employees, who was well known in the community, was given about $2 million in cash by a criminal organization. He subsequently deposited the money in the bank, saying it had been donated by devoted supporters. The financial institution, which had complete confidence in this individual, accepted his explanation without question. The employee then asked for a bank draft to be issued in the name of a third party.
The apparent wrongdoing was eventually discovered, but the employee was acquitted of all charges related to money laundering because Crown counsel couldn't prove he was aware of the criminal origin of the money. He was, however, fired.
Since all of the organizations affected by the act have a finance function, and that function is often performed by a chartered accountant, CAs can play a decisive role in ensuring its application. In general, the person in charge of compliance in a large organization is responsible for ensuring that anti-money-laundering standards are met. Because of their role and expertise, employees assigned to the finance function can be involved right from the start. They can take part in developing the action plan the organization intends to implement in order to comply with the act. They can also actively participate in setting up a compliance program and ensure its ongoing operation.
An effective action plan should determine from the outset the extent to which the act will affect the processes and employee units concerned. It is also advisable to perform an impact analysis in the early stages of implementation.
The act also has considerable financial implications for organizations. Any assessment of its financial impact should include the costs tied to developing policies, establishing systems for collecting and forwarding reports to the relevant federal agency, training human resources and, in certain circumstances, assigning additional staff.
As a partner, the controller of an organization can provide advice on how to minimize the cost and the effort needed to develop and implement the measures required under the act. Risk management can become a key factor in obtaining valid results at a reasonable cost. The specific characteristics of an organization should always be taken into account when analyzing its risk exposure when it comes to money laundering.
Internal auditors
Chartered accountants acting as internal auditors of entities directly affected by the act also have an important role to play. Like all professionals involved in the finance function, they can be very effective in helping organizations deal with money-laundering issues and apply related legislation and regulations.
First of all, because of their extensive knowledge of the organization, chartered accountants can be instrumental in making management aware of the new act's implications. They can also contribute to developing and putting in place their organization's compliance program. And thanks to their expertise and their understanding of the entity as a whole, they can participate in the risk analysis, which in turn will enable the organization to develop more effectively its compliance and control mechanisms.
Internal auditors can also incorporate into their audit programs indicators of suspicious transactions that are applicable to their organization, to help identify suspicious transactions and improve anti-money-laundering measures. These indicators include:
- employees living above their means;
- weak internal control, especially regarding bank transfers;
- clients paying more than the value of sold goods;
- transactions in foreign countries with little business grounds;
- discrepancies between transfer prices and imported/exported goods;
- loans destined for, or originating from, foreign countries;
- use of letters of credit or other commercial financing methods in order to transfer money between countries - but these commercial links do not correspond to the client's usual business.
Finally, internal auditors can take charge of reviewing the compliance policies and measures provided for in the guidelines. This review consists of determining how the measures and policies in place effectively ensure compliance with Bill C-22 and proposed regulations, as well as identifying areas for improvement and bringing them to the attention of management with a view to preparing remedial action plans when necessary.
While some accountants may see Bill C-22 as too demanding, it can instead be viewed as a window of opportunity for our profession. It represents a chance for chartered accountants in both public practice and industry to promote their expertise. But above all, the new act clearly mirrors the motto of this month's International Money Laundering Conference (IMLC), which will be held in Montreal - "Together to fight organized crime."
Risky business
These are the risk factors your organization needs to be aware of:
- The basic risk that it is being used as a money-laundering tool. For instance, drug traffickers could use a life insurance company's products to muddy the trail of their illicit funds by buying a policy and then cashing it in years later.
- The risk of not detecting a suspicious transaction, even though all the indicators that could identify it as such are present.
- The risk of identifying too many suspicious transactions. For example, an employee whose constant cries of "wolf" alienate clients.
- The risk of not reporting, or reporting after the prescribed deadline, a transaction provided for in the act; this is especially likely to occur if the systems in place are inadequate and not adapted to the organization's needs.
- The risk of an employee and/or an organization incurring the severe penalties and fines set out in the act. However, care should be taken to avoid becoming paranoid.
Knowledge is power
The best way to ensure you stay within the boundaries of the new law is to keep informed about money-laundering issues. Know the various means criminals employ to launder their funds so that you'll be able to detect these kinds of transactions. Here are some websites that can provide this information:
www.fintrac.gc.ca (Government of Canada's Financial Transactions and Reports Analysis Centre)
www.oecd.org (Organisation for Economic Co-operation and Development)
Éric Lavoie, CIA, CA, is a partner with the Quebec accounting firm Lemieux Nolet, where his areas of expertise include performance improvement and risk management and control.
Guylaine Leclerc, CA·IFA, CFE, is also a partner with Lemieux Nolet. She has published numerous articles on money laundering, fraud and wilful blindness, and was co-author of a Canadian study on the role of forensic accountants in money-laundering cases. She has testified as an expert witness in many criminal and civil disputes at the Quebec Court of Justice, as well as the Superior Court of Justice.
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