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Anti-money Laundering

Money Laundering is the process by which proceeds of crime are put through a series of transactions to disguise their illicit origin and make them appear to have come from a legitimate source. The IMF estimates that word-wide money...

laundering could amount to 2-5% of the global GDP. The process of money laundering involves placement, layering and integration. Placement is where illegal money is introduced into the legal financial system. Layering involves concealing the source of money through a series of small transactions whereas Integration entails illegal money being absorbed into the economy as legitimate.

What are some of the red flags companies should look out for?

Companies should look out for several issues to pick possible money laundering instances; These are inconsistent customer behavior such as unexplained large cash transactions, unclear ultimate...

beneficial owners, adverse media mentions, transactions with sanctioned countries, limited customer screening procedures/disclosures among others.

What compliance program should the company institute to prevent money laundering?

An effective compliance program should be able to address the laws and regulations of a jurisdiction. In Kenya, this is governed by the Proceeds of Crime and Anti

Money Laundering Act (POCAMLA); the Proceeds of Crime and Anti Money Laundering Regulations as well as relevant regulations as set out by the Central Bank of Kenya. The core components of the program should highlight the following:

  • Customer Due Diligence procedures.
  • ML/TF risk assessment and risk categorization procedures.
  • AML/CFT governance structure, policies and procedures.
  • Monitoring processes and systems used for transaction monitoring.
  • Regulatory reporting mechanism with the Financial Reporting Centre (FRC).
  • The AML/CFT training program.
  • Record keeping procedures; and
  • Operations and role of the Money Laundering Reporting Officer (MLRO).

Financial Statements Fraud

Financial statement fraud mainly involves overstating revenues, assets and profits and understating liabilities, expenses and losses. The act is often intentional. The management has due responsibility of ensuring credible financial

statements are prepared and presented to stakeholders.

Why do people commit financial statement fraud?

  • To cover inability to generate cashflow
  • To avoid negative market perceptions
  • To receive performance related bonuses
  • To obtain financing or receive favorable terms

What opportunities may cause fraud to exist?

  • Weak internal controls
  • Lack of oversight
  • Absence of a Board of Directors

Common types of financial statement fraud.

  • Improper accounting of loan impairments
  • Inventory misstatements
  • Improper revenue recognition
  • Manipulation of reserve accounts.

Financial statement fraud may involve timing differences where revenues and expenses are recorded in improper periods. This may be done to shift revenues and expenses between one period and the next thus increasing or decreasing earnings.

Difference between Forensic Audit and Internal Audit;

Forensic Audit entails the examination of a firm’s financial records to identify irregular activities and derive evidence that can be used in a court of law. Internal Audit is the independent...

and objective assurance of an organization’s operations. It provides an approach in which the effectiveness of risk management, control and governance processes are evaluated.

An organization should consider a Forensic Audit where:

  • There is suspicion of fraud or theft
  • There are unidentified reconciliation differences
  • A whistleblower hotline identifies issues such as assets stolen or other fraud issues, among others.

An organization should consider an Internal Audit where:

  • Risks in operations, compliance and reporting are unrecognized due to significant changes in the industry, technology, laws and regulations.
  • Existing policies and procedures are not being followed.
  • Board of Directors is concerned about specific business operations, among others.

Fraud Risk assessment

For an organization to effectively manage its fraud risks, the risks must first be identified using a formal risk assessment.

Why Customer Due Diligence is necessary in combating Money Laundering

Customer Due Diligence (CDD) is the process of verifying the identity of customers before establishing a business relationship with them as well as assessing their risk level.

Reducing Money-laundering Risk

The constant fight to deter financial crimes by government institutions such as the Central Bank of Kenya (CBK) and Financial Reporting Centre (FRC) as well as international agencies has been a frustrating one