Accountants’ Anti–Money-Laundering Responsibilities
By Steven V. Melnik
Accountants’ anti–money-laundering responsibilities are more important than ever. The terrorist attacks of September 11 led to a number of governmental actions aimed at preventing terrorism and related money-laundering activities. The recently enacted USA Patriot Act (USAPA) is the latest example of the government’s determination to fight money laundering.
The USAPA authorizes the U.S. Department of the Treasury to create new anti–money-laundering rules as well as to extend some of the previously existing rules to a new set of professionals, including accountants. Even before September 11, however, the government continuously stressed the contribution accounting professionals can and must make in preventing money laundering. The government’s concern—combined with the major scrutiny and confidence crisis currently enveloping the accounting profession—make it important for all accountants to properly execute their anti–money-laundering responsibilities.
What Is Money Laundering?
Money laundering is a process of concealing the criminal source of funds. The “laundering” process usually consists of three phases or cycles: placement, layering, and integration. During the placement phase, the funds are deposited into a legitimate financial institution, such as a bank. During the layering phase, the funds are transferred to and from various financial institutions in order to make the initial deposit untraceable. Finally, during the integration phase, the funds are “legitimized” through a deposit into a legitimate business enterprise.
While the true extent of money laundering is difficult to estimate, recent studies suggest that it represents a $500 billion to $1 trillion problem worldwide.
Accountants’ responsibilities with respect to money laundering vary depending on the services they perform.
GAAS audits. Money laundering usually does not have a direct effect on financial statements. Instead, its effect is indirect, such as through an increase in contingent liabilities due to potential money-laundering–related lawsuits. Under SAS 54, Illegal Acts by Clients, auditors are not required to design their audit procedures with the goal of detecting illegal activities that have an indirect effect on financial statements. Instead, SAS 54 requires the auditor merely to be aware of the possibility that illegal acts with indirect effects on financial statements have taken place.
Auditors do, however, have substantial responsibilities once they notice activities that resemble money-laundering. Auditors must first determine if the suspected money-laundering activities are likely to have a material effect on financial statements (considering potential legal costs, fines, penalties). If so, SAS 54 requires auditors to perform audit procedures aimed at determining whether or not money laundering has in fact taken place. These additional procedures can consist of obtaining a more detailed understanding of the questionable transactions, the business reasons behind the transactions, and the parties involved. While obtaining a better understanding of the suspected money-laundering activity, SAS 54 states that the auditor should deal with the management at the level above those involved (if there is a level above those involved).
Obviously, accountants are not expected to be legal experts, which is often necessary in order to assess criminality or the likely legal consequences of any particular act. The auditors, however, are expected to seek professional advice whenever appropriate. For example, if management does not convince the auditor that money laundering has not occurred, SAS 54 states that the auditor should consult with the client’s legal counsel or other specialists.
If an auditor believes that money laundering has taken place and is dissatisfied with management’s remediation, the Private Securities Litigation Reform Act of 1995 requires auditors to report money-laundering activities to the client’s board of directors. The board is required to notify the SEC within one day of being notified by the accountant. The act further requires accountants to notify the SEC if the board does not do so.
If an accountant believes the consequences of the money laundering have not been properly accounted for or disclosed on the financial statements, SAS 54 states that the auditor should express a qualified or adverse opinion on the financial statements. If the client refuses to accept the auditor’s modified report, the auditor should resign.
Financial institutions. The U.S. government has imposed affirmative anti–money-laundering responsibilities on certain financial institutions: banks, bank holding companies, broker-dealers, casinos, and money service businesses. Under the Bank Secrecy Act, financial institutions are required to file a Currency Transaction Report with the government every time a customer executes one or more cash transactions totaling more than $10,000. The government also requires financial institutions to file a Suspicious Activity Report (SAR) if they suspect that a customer is involved in money-laundering activities.
Furthermore, the USAPA authorizes the Treasury Department to impose a new set of anti–money-laundering responsibilities on financial institutions, known as customer identification requirements. This new measure will require financial institutions to better understand a customer’s background and business in order to identify possible money-laundering activities.
Many of these anti–money-laundering requirements are applicable not only to the financial institutions but also to their employees. Thus, if an accountant working for a bank becomes aware of a customer’s money-laundering activities and fails to file a SAR (or inform the appropriate level of the bank’s management regarding potential illegal activities), that accountant can be prosecuted by the government. The penalties for failure to follow anti–money-laundering rules and regulations range from civil penalties to criminal prosecutions.
Because accountants are often processing and evaluating clients’ financial records and activities, they may inadvertently become exposed to potential money-laundering activities. The Financial Crimes Enforcement Network, established under the authority of the Treasury Department to fight money laundering, lists examples of activities that should be deemed suspicious. For example, a customer moving money to and from known terrorist-friendly countries, making large cash deposits without an apparent business reason, or entering into transactions without any apparent lawful purpose, may be considered suspicious under certain circumstances. See www.fincen.gov for more examples of suspicious activities.
Accountants are advised to talk to a financial institution’s management regarding their anti–money-laundering responsibilities. Accountants should know whether their employer is one of the financial institutions charged with the government’s affirmative anti–money-laundering responsibilities (a merger, acquisition, or restructuring can change a company’s legal status and its anti–money-laundering responsibilities). Accountants should also learn the scope of a company’s anti–money-laundering infrastructure (e.g., whether there is a designated officer responsible for the institution’s anti–money-laundering efforts), and whom to consult or what to do if she comes across potential money-laundering activities.
Public accounting firms. Money launderers often seek assistance from professionals such as accountants and attorneys. Money launderers may also obtain assistance from accountants without accountants fully realizing it. A client may ask an accountant to wire money to and from various bank accounts without giving any reasonable explanation for it. Clients may also ask accountants to make cash deposits in different financial institutions with amounts just under the $10,000 reporting requirement. Finally, clients may ask accountants to issue checks to them or their vendors in return for cash.
In these and other similar situations, the government may go as far as charging accountants as accomplices to the money-laundering crime. If the government is not able to prove accountants’ actual knowledge of criminal activities, the government may use the “willful blindness” argument it has used in prosecuting attorneys. This argument is used to impute the necessary criminal knowledge or intent, claiming that the individual deliberately “looked the other way” and purposefully did not ask questions about the source of funds or the reason for certain transactions.
It is therefore crucial for accountants to be familiar with the crime of money laundering. Whenever faced with a questionable situation, it is recommended to seek advice from a licensed attorney. It is better to try and prevent a potential problem from occurring in the first place. Thus, accountants should exercise care in deciding which clients to accept and which to reject.
Accountants are exposed to companies’ operations and financial records. They are considered to be experts in the design, maintenance, and operation of various internal controls. These and other factors place accountants on top of the government’s list of professionals most likely to successfully identify and report money-laundering activities.
The government has already openly acknowledged its plans to have the accounting profession play a more active anti–money-laundering role in its National Money Laundering Strategy Reports for 2000 and 2001. Deputy Treasury Secretary Stuart Eizenstat, during his congressional testimony before the Committee on Banking and Financial Services, said that: “We are considering how existing accounting standards, on such subjects as illegal acts of clients … can incorporate money laundering safeguards.”
It is generally expected that there will be significant increases in accountants’ anti–money-laundering responsibilities. These new anti–money-laundering responsibilities may take many forms. At a minimum, the government is likely to require accounting firms to institute an anti–money-laundering infrastructure. Accounting firms are likely to be required to educate their employees on money laundering–related issues, techniques, and courses of action in cases where clients are suspected to be involved in money laundering.
Accounting firms may be required to designate an officer responsible for overseeing the organization’s anti–money-laundering efforts. In addition, the government may require accounting firms to file an SAR if they suspect a client of laundering money. The United Kingdom already places these requirements on its accountants.
Robert H. Colson, PhD, CPA
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