Money Laundering: The Role of a Forensic Accountant as an Expert Witness

This paper was presented by Amadiebube Robert Mbama, MBA, ACA, CFF, CPA, CAMS at the ICAN conference held at the International Conference Center in Abuja, October 13-17, 2008.

This paper traced the historical perspective of global action against money laundering, discussed what is money laundering and stages of money laundering.  It further discussed what is forensic accounting and who is a forensic accountant, who is an expert witness as well as the role of a forensic accountant as an expert witness.  Finally it examined how the ‘Nigerian Factor’ affects the role of a forensic accountant as an expert witness.

The Historical Perspective of Global Action against Money Laundering

When it became obvious that money laundering was having a negative effect on the economies of the world, the Group of Seven industrialized nations met in 1989 in Paris and formed the Financial Action Task Force (FATF).

FATF is an inter-governmental body whose purpose is the development and promotion of national and international policies to combat money laundering and terrorist financing. The FATF is therefore a 'policy-making body' created in 1989 that works to generate the necessary political will to bring about legislative and regulatory reforms in these areas. The FATF has published 40 recommendations and 9 Special Recommendations in order to meet this objective. For details about FATF please see www.fatf-gafi.org. In 1990 FATF established and issued its 40 recommendations. The recommendations were again revised in 1996 and 2003. The 9 Special Recommendations dealt mostly on measures to counter terrorism.

All the recommendations and Special Recommendations are geared towards combating money laundering and terrorist financing. However, I presented four recommendations that are particularly pertinent to my presentation. The four recommendations are Recommendation 1, Recommendation 26, Recommendation 36 and Recommendation 37.

Recommendation 1 states that “Countries should criminalize money laundering on the basis of United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 1988 (the Vienna Convention and United Nations Convention against Transnational Organized Crime, 2000 the Palermo Convention).

Countries should apply the crime of money laundering to all serious offences, with a view to including the widest range of predicate offences. Predicate offences may be described by reference to all offences, or to a threshold linked either to a category of serious offences or to the penalty of imprisonment applicable to the predicate offence (threshold approach), or to a list of predicate offences, or a combination of these approaches.

Where countries apply a threshold approach, predicate offences should at a minimum comprise all offences that fall within the category of serious offences under their national law or should include offences which are punishable by a maximum penalty of more than one-year imprisonment.  For those countries that have a minimum threshold for offences in their legal system, predicate offences should comprise all offences, which are punished by a minimum penalty of more than six months imprisonment.

Whichever approach is adopted, each country should at a minimum include a range of offences within each of the designated categories of offences.

Predicate offences for money laundering should extend to conduct that occurred in another country, which constitutes an offence in that country, and which would have constituted a predicate offence had it occurred domestically. Countries may provide that the only prerequisite is that the conduct would have constituted a predicate offence had it occurred domestically.

Countries may provide that the offence of money laundering does not apply to persons who committed the predicate offence, where this is required by fundamental principles of their domestic law.”

Recommendation 26 states that “Countries should establish a financial intelligent unit (FIU) that serves as a national centre for the receiving (and, as permitted, requesting), analysis and dissemination of suspicious transaction report (STR) and other information regarding potential money laundering or terrorist financing. The FIU should have access, directly or indirectly, on a timely basis to the financial, administrative and law enforcement information that it requires to properly undertake its functions, including the analysis of STR.”

 Recommendations 36 and 37 - Mutual Legal Assistance Treaty among countries.

Recommendation 36 states that “Countries should rapidly, constructively and effectively provide the widest possible range of mutual legal assistance in relation to money laundering and terrorist financing investigations, prosecutions, and related proceedings. In particular, countries should:

a) Not prohibit or place unreasonable or unduly restrictive conditions on the provision of mutual legal assistance.

b) Ensure that they have clear and efficient processes for the execution of mutual legal assistance requests.

c) Not refuse to execute a request for mutual legal assistance on the sole ground that the offence is also considered to involve fiscal matters.

d) Not refuse to execute a request for mutual legal assistance on the grounds that laws require financial institutions to maintain secrecy or confidentiality.

Countries should ensure that the powers of their competent authorities required under Recommendation 28 are also available for use in response to requests for mutual legal assistance, and if consistent with their domestic framework, in response to direct requests from foreign judicial or law enforcement authorities to domestic counterparts.

To avoid conflicts of jurisdiction, consideration should be given to devising and applying mechanisms for determining the best venue for prosecution of defendants in the interests of justice in cases that are subject to prosecution in more than one country.”

Recommendation 37 states that “Countries should, to the greatest extent possible, render mutual legal assistance notwithstanding the absence of dual criminality.

Where dual criminality is required for mutual legal assistance or extradition, that requirement should be deemed to be satisfied regardless of whether both countries place the offence within the same category of offence or denominate the offence by the same terminology, provided that both countries criminalize the conduct underlying the offence.”

Recommendation 26 and the evolution of the Economic and Financial Crimes Commission (EFCC)

The EFCC was established in response to recommendation 26. Failure to establish recommendation 26 would have been costly to Nigeria. The economic cost for Nigeria for non-compliance with the FATF mandate would have been astronomical. Even after Nigeria established the EFCC, she remained on the list of non cooperative countries and territories (NCCT) until 2006. For a while the NCCT list had only Nigeria and Myanmar (formerly Burma) until both were removed in 2006. While Nigeria was removed from the list on June 23, 2006, Myanmar was removed on October 13, 2006.

While it is called EFCC in Nigeria, it is called Financial Crimes Enforcement Network (FinCEN in USA), Financial Transactions Reports Analysis Centre of Canada (FINTRAC), Australian Transaction Reports and Analysis Centre. Many other countries have different names for it.

Even before EFCC was established, the Independent Corrupt Practices And Other Related Offences Commission (ICPC) Establishment Act of 2000 was in existence.

Money Laundering

Money laundering is defined as the process of concealing the existence, illegal source, or application of income derived from criminal or illegitimate activity, and the subsequent disguising of the source of that income to make it appear legitimate (Association of Certified Anti-Money Laundering Specialists - ACAMS). Laundered money is like water, it seeks the path of least resistance (ACAMS).  Initially, money laundering was associated with drug trafficking and organized crime, however, it has been expanded to include extortion, terrorism, official bribery and corruption, arms smuggling, white collar crime and many other crimes.

The Three Stages of Money Laundering

Placement

Placement involves physically placing illegally obtained money into the financial system or the retail economy. "Dirty" money is most vulnerable to detection and seizure during placement. (U.S. Financial Crimes Enforcement Network)

Layering

Layering is the separation of illegally obtained money from its source through a series of financial transactions that makes it difficult to trace the origin.

During the layering phase of money laundering, criminals often take advantage of legitimate financial mechanisms in attempts to hide the source of their funds.

A few of the many mechanisms that may be misused during layering are currency exchanges, wire transmitting services, prepaid cards that offer global access to cash via automated teller machines and goods at point of sale, casino services and domestic shell corporations lacking real assets and business activity that are set up to hold and move illicit funds. (U.S. Financial Crimes Enforcement Network)

Integration

Integration means converting the illicit funds into a seemingly legitimate form. Integration may include the purchase of businesses, automobiles, real estate and other assets. (U.S. Financial Crimes Enforcement Network)

Forensic Accounting

Forensic accounting is the specialty practice area of accountancy that describes engagements that result from actual or anticipated disputes or litigation.

"Forensic" means "suitable for use in a court of law", and it is to that standard and potential outcome that forensic accountants generally have to work.

Forensic accountants, also referred to as forensic auditors or investigative auditors, often have to give expert evidence at the eventual trial.

All of the larger accounting firms, as well as many medium-sized and boutique firms have specialist forensic accounting departments. Within these groups, there may be further sub-specializations: some forensic accountants may, for example, just specialize in insurance claims, personal injury claims, fraud, construction, or royalty audits. (Source Wikipedia).

Recently Forensic accountants have started to develop expertise in tracking laundered money. Nigerian Forensic accountants should lead the rest of the world in developing expertise in tracking laundered money. This has urgency written all over it since Nigeria’s economic growth has been hampered by corruption which is a form of money laundering.

Who are Forensic Accountants?

Forensic accountants may be involved in recovering proceeds of crime and in relation to confiscation proceedings concerning actual or assumed proceeds of crime or money laundering. Some forensic accountants are also Certified Fraud Examiners, Certified Public Accountants, Certified Anti Money Laundering Specialists, or Chartered Accountants.

Forensic accountants utilize an understanding of business information and financial reporting systems, accounting and auditing standards and procedures, evidence gathering and investigative techniques, and litigation processes and procedures to perform their work.

Are There Differences Among Forensic Accountants?

The major difference lies in the focus. While some may focus on fraud, others may focus on money laundering. No matter the differences, adequate training and hands on experience will determine the level of expertise.

Forensic accountants are also increasingly playing more proactive risk reduction roles by designing and performing extended procedures as part of the statutory audit, acting as advisers to audit committees, fraud deterrence engagements, and assisting in investment analyst research. (Source Wikipedia)

Who is an Expert Witness?

An expert witness is a witness, who by virtue of education, training, skill, or experience, is believed to have knowledge in a particular subject beyond that of the average person, sufficient that others may officially (and legally) rely upon the witness's specialized (scientific, technical or other) opinion about an evidence or factissue within the scope of their expertise, referred to as the expert opinion, as an assistance to the fact-finder. Expert witnesses may also deliver expert evidenceabout facts from the domain of their expertise. At times, their testimony may be rebutted with a learned treatise, sometimes to the detriment of their reputations.

What is the role of an Accountant as an Expert Witness?

The principal role of a Forensic Accountant is to Analyze, Interpret, Summarize and Present Complex Business and Financial deals in a logical, understandable manner supported with facts.

As an Expert Witness, the Forensic Accountant must (a) Investigate and Analyze Financial information. (b) Develop Computerized applications (if applicable) to Assist in the Analysis and Presentation of Financial information. In addition, an Expert Witness must:

• Communicate Findings in the form of a Report and supporting documents.
• Assist in any Legal Proceedings.
• Assist in obtaining documentation necessary to support or refute a claim.
• Review of the relevant documentation to form an initial assessment of the case and identify areas of loss.
• Assist with Examination for Discovery including the formulation of questions to be asked regarding the financial evidence.
• Attend the Examination for Discovery to review the testimony, assist with understanding the financial issues and to formulate additional questions to be asked.
• Review of the opposing expert's damages report and reporting on both the strengths and weaknesses of the positions taken.
• Assist with settlement discussions and negotiations.
• Attend trial to hear the testimony of the opposing expert and to provide assistance with cross-examination.

Source: Alan Zysman B.Comm, CA·IFA, CFE has been in practice since 1984.  His firm Zysman Forensic Accounting Inc. located in Toronto, Ontario, Canada specializes in the provision of Investigative and Forensic Accounting services.

In addition, the following steps must be taken:

• Meet with key individuals
• Discuss expectations
• Discuss fees and reimbursable costs
• Gather Evidence after meeting with key individuals
• Research
• Discuss with key individuals on information that was obtained after research
• Make any necessary adjustment to the facts, if any, after discussion with key individuals
• Write a formal report supported by evidence

The Nigerian Factor that will affect the Role of an Accountant as an Expert Witness

Environment

Nigeria has a very weak infrastructural base. The road network is poor, the electricity situation is still backwards, the telecommunication system telephone is not secure as a result of reliance on wireless telephones, and the internet is still at a the developmental stage. This weak infrastructural base makes the work of the forensic accountant difficult.

Weak judicial system

Even though the judiciary has improved somewhat recently much more needs to be done. The inability of the court to adjudicate cases timely has led to mistrust and lack of confidence in the court system. In a weak judicial system, property rights and the rights of individuals as well as information may not be vigorously protected.  This gives room for manipulation and unreliability of information.

Weak educational system

There was a time when a Nigerian high school (secondary school) graduate will stand toe to toe with any student from anywhere in the world. Those days are gone. Our tertiary institutions have not fared better. After all the tertiary institutions mirror the secondary schools because the products of those secondary schools end up in the tertiary institutions. Prospective students purchase admissions into the tertiary institutions and once in those institutions students are compromised by forcing them to pay for their papers to be graded. This is not to paint all the institutions with the same brush but this is happening enough to warrant action by authorities. These students are the future workers and if they are not property educated, the information produced by such people as workers may not be reliable.

Indiscipline

Indiscipline retards development. In an environment where rules and regulations are not generally obeyed, the system becomes compromised and weak. When the system is compromised and weak, the evidence may not be completely reliable. This may affect the work of the forensic accountant. Indiscipline creates chaotic social or work environment. Experts needs structured environment to work. Indiscipline work environment creates mistrust and retards development and spiritual growth.

Corrupting Tendencies

In an environment where people are ever willing to compromise their values it is difficult to rely on documents or evidential matter coming from that environment.

Abuse of office and abuse of power

It is very difficult for an expert to work in an environment where those who swore to uphold the law, are the law breakers themselves. In an environment where those in power determine who says what or who gets what, it will be difficult for an expert to make an informed decision based on the fact that whatever decision the expert makes may be tainted because of the fear of those in power.

Rule of Law

The law is no respecter of any person. However, when the law is meant to favor those who have money or those in authority, it becomes difficult to rely on the legal system for justice or relief for the populace which will include the experts most of whom may not be rich or powerful. In addition, if the law is selectively applied or there is insincerity in its application, it makes it difficult for the expert to rely on the legal system. If the law is applied based on religious, ethnic, political, social, or gender sentiment, it also makes it difficult for the expert to rely on the legal system either for relief or expert opinion. In most cases the legal system has been used to delay justice. There is a saying that justice delayed is justice denied. This may make the work of the expert very difficult.

Lack of continuity

In Nigeria, there is no continuity of programs, policies, or procedures. There is a tendency for every new leader to reinvent the wheel. This situation may affect the work of an expert because a situation that was relied upon to make an informed decision during a previous administration may no longer be relied upon because of program, policy, or procedure change.  

Too much centralization of authority

There is a saying that absolute power corrupts absolutely. There is no place where this statement has affected the economy than in Nigeria. Experts who want to get information may have to travel long distances in order to get the information. In many instances when the expert gets to the location, he or she may even be required to wait for hours if not days before getting the information. The cost to the economy for such concentration of authority is unquantifiable. There is no reason why Nigeria cannot decentralize its economic and political decision making centers. This does not only make the economy efficient, it increases productivity.

“Too many Chiefs and not enough Indians”

Humility is a virtue but in Nigeria humility is regarded as a sign of weakness. This phenomenon has resulted in the citizens of the country being title crazy. People are not only title crazy but they want to be regarded and addressed as such. An expert who does not buy into this mentality may have his or her work thrown out or sabotaged.   

Fiscal indiscipline

A budget is a financial road map that guides the preparer to a desired financial goal. However, in Nigeria a budget is a financial road map to individual wealth. The lack of fiscal discipline has brought with it untold hardship on the people. It is difficult to see how an expert especially a forensic account can reconstruct accounts knowing that most of those figures may be made up.   

Lack of transparency

Transparency goes hand in hand with openness and with openness comes accountability. A system that allows an individual to be given enormous amount of money as ‘Security Vote’ and where the receiver is not required to account for the money compromises probity and accountability. An expert especially a forensic accountant may find out that in a system where there is little or no transparency, information especially financial information coming from such system may be suspect.

Institutionalized corruption and institutionalized money laundering

It is very difficult to rely on any information that is produced in a corrupt environment. When people’s values can be easily compromised, reliability of information coming from such environment is questionable. This makes the work of the expert difficult because reliability of information is a key to the success of the expert and his or her ability to render an expert opinion.

In conclusion, the role of a forensic accountant as an expert witness in a money laundering and corrupt environment is a daunting task that will require enhanced due diligence and enhanced investigative skills. With such skills, the forensic accountant will produce enough information to support a client even in a money laundering and corrupt environment.