Accountants, Corruption, and Money Laundering

By Robert K. Larson and Paul J. Herz

In Brief

Terrorism and Money Laundering Are Real Threats

Accountants are faced with new responsibilities under the USA Patriot Act, passed in response to the events of September 11, 2001. This act broadens the powers of the government to investigate terrorism and its sources of funding, including money laundering. Accountants have an obligation under the act to join in the fight against corruption and money laundering. One tool available to accountants is the corruption perceptions index, which is a more objective way to compare the level of corruption in other countries. It allows businesses to be more aware about the countries they are dealing with when making investments.

Corruption, particularly in the form of money laundering, has received renewed attention since the events of September 11, 2001. In October 2001, President Bush signed into law the USA Patriot Act (USAPA), which, among other provisions, targets money-laundering activities. The U.S. Department of the Treasury is in the process of issuing a series of rules for the implementation of the act. It is important for businesses, business advisers, investors, and investment advisers dealing in foreign countries and with foreign corporations to be aware of this continuing global problem. While accountants have long been involved in the fight against corruption, their role is more important than ever.

Accountants’ Fight Against Corruption

In response to a rash of widely publicized corporate bribery cases in the 1970s, the U.S. Congress passed the Foreign Corrupt Practices Act (FCPA) of 1977, which was amended in 1988 and 1998. The FCPA clearly states that U.S. businesses must not engage in illegal bribery and must have systems of internal controls to detect and prevent illegal payments. The 1988 amendments to the FCPA increased already harsh penalties for noncompliance (now up to $2 million for organizations, and $100,000 or five years in jail for individuals).

The International Federation of Accountants (IFAC) is also fighting corruption. IFAC’s membership consists of 155 professional accounting associations, including the AICPA, representing 113 countries. IFAC issued a discussion paper on anti–money laundering in January 2002. IFAC views corruption broadly and includes “bribery, fraud, illegal payments, money laundering, smuggling and as many other forms as criminal minds may devise.” For more information, or to view the discussion paper, visit www.ifac.org.

USA Patriot Act

The USAPA was intended to strengthen the federal government’s ability to combat terrorism and to prevent, detect, and stop money-laundering activities. In September 2002, Jimmy Gurule, undersecretary of enforcement in the Treasury Department, announced:

The USAPA and its new money-laundering regulations affect a broad range of “financial institutions.” As defined by the act, financial institutions include banks, securities firms, credit-card companies, insurance companies, mutual funds, hedge funds, wire-transfer firms, casinos, and commodity dealers.

The USAPA has a number of provisions intended to stop terrorists and others involved in money-laundering activities. Probably the most important is the requirement for comprehensive money-laundering compliance programs. The USAPA modifies 31 USC 3158(h) to read as follows:

(h) Anti–Money Laundering Programs.
(1) In General—In order to guard against money laundering through financial institutions, each financial institution shall establish anti–money laundering programs, including, at a minimum—

(A) the development of internal policies, procedures and controls;
(B) the designation of a compliance officer;
(C) an ongoing employee training program; and
(D) an independent audit function to test programs.

The act specifies requirements for recordkeeping and reporting of certain financial transactions. For example, section 311 of the act states that if the Secretary of the Treasury is concerned about money laundering, the secretary “may require any domestic financial institution or financial agency to maintain records, file reports, or both, concerning the aggregate amount of transactions, or concerning each transaction.” There are serious penalties for violating the act, including monetary penalties of up to three times the amount of the bribe and up to 15 years in prison.

Since April 2002, the Treasury Department has been issuing a series of rules regarding the detection and prevention of money laundering as part of the implementation of the USAPA. Some rules have now been finalized, while others are still in earlier stages. Accountants need to be aware of the act and the new rules, especially those relating to recordkeeping and internal controls. To view the full text of the USAPA, visit www.epic.org/privacy/terrorism/hr3162.pdf. For the updated rules of the act, visit the Treasury Department at www.ustreas.gov.

While all U.S. companies must comply with the specifics of the FCPA and the USAPA’s new money-laundering rules, there are tools to help focus one’s efforts. The IFAC paper and SAS 47, Audit Risk and Materiality in Conducting an Audit, discuss the importance of risk assessment. SAS 54, Illegal Acts by Clients, and SAS 99, Consideration of Fraud in a Financial Statement Audit, also describe the importance of risk assessment, as well as financial statement auditor responsibilities in such instances.

The Corruption Perceptions Index

Historically, certain countries have had a much higher level of corruption than others. The corruption perceptions index (CPI) was created by Transparency International, a nonprofit organization established in 1993 (www.transparency.org). The CPI “is a poll of polls” aimed at determining the level of corruption in countries around the world. The 2002 index is based on 15 different surveys from nine independent organizations. The score for each of the 102 countries in the 2002 index was based on a minimum of three surveys done during the last three years. Reflected in the survey are the opinions of industry professionals, academics, and country analysts (see the Exhibit).

A scale of 0 to 10 is used, where 10 represents a noncorrupt environment. The highest score was earned by Finland at 9.7. A score of 5 or less indicates a high level of corruption. Bangladesh earned the lowest score, 1.2. The 2002 index found that almost 70% of the countries included in the index had a score of less than 5. The exhibit also includes the relative rank of each of the 102 countries.

The CPI suggests that more-affluent, developed countries have much lower rates of corruption. The 10 countries with the lowest levels of corruption were Finland, Denmark, New Zealand, Iceland, Singapore, Sweden, Canada, Luxembourg, Netherlands, and the United Kingdom. (The United States ranked 16.)

The index suggests that poorer developing countries more often have the highest levels of corruption. The 10 countries with the lowest scores were Bangladesh, Nigeria, Paraguay, Madagascar, Angola, Kenya, Indonesia, Azerbaijan, Moldova, and Uganda. Most of the former Soviet republics and the Eastern European countries had scores below 5. Each country is unique, and these generalizations have exceptions. For example, Botswana is ranked 24 with a 6.4, while Greece was ranked 42 with a 4.2.

U.S. companies are probably most concerned about corruption in the dozen countries that receive the most exports from the U.S. The country importing the most from the U.S. is Canada, with a rating of 9.0. The other countries receiving the most U.S. exports are, in descending order, Mexico (3.6), Japan (7.1), the United Kingdom (8.7), Germany (7.3), South Korea (4.5), the Netherlands (9.0), Taiwan (5.6), France (6.3), Singapore (9.3), Brazil (4.0), and China (3.5).

Recent events have focused attention on the Middle East. Most Middle Eastern countries, including Afghanistan, Iran, Iraq, Saudi Arabia, and Yemen, are not listed in the CPI. Of the Middle Eastern countries listed, only Israel had a score above 5.0. At the low end of Middle Eastern countries listed was Pakistan with a score of 2.6.

Corruption Risk Assessment

The FCPA and, now, the USAPA and its new money-laundering rules require the attention of accounting professionals. Accountants are increasingly responsible for more effective systems of internal controls as well as periodic evaluations, examinations, and audits. Risk assessment is an important tool when determining where to focus limited resources. The CPI can be a useful indicator of the risk of corruption that exists in particular countries. A measure of the overall and relative level of corruption in a country where investing is being considered, or in countries where firms have international activities and foreign subsidiaries, should be useful. The CPI may be a helpful indicator for external auditors, investors, internal auditors, and executives, especially those endeavoring to meet the challenges of complying with the new laws and regulations.