oney laundering is so widespread CPAs are likely to
encounter it at some point in their work. It is an essential element
of the “underground economy,” which, worldwide, amounts to trillions
of dollars. An independent auditor’s responsibilities in the area of
money laundering, because it is a criminal act, are governed by
Statement on Auditing Standards no. 54, Illegal Acts by Clients,
which requires CPAs to be familiar with the types of illegal
behaviors that could have a direct and material impact on financial
statements. The new fraud standard, SAS no. 99, Consideration of
Fraud in Financial Statements, requires independent auditors to
assess the risk that fraud could materially misstate the financials.
Eddie Antar, the president and CEO of Crazy Eddie’s Electronics, a nationwide chain, and architect of a classic money-laundering scheme recounted here, shared a common problem with everyone else who has ever accumulated illegal loot: where to hide it. In this article CPAs will learn the basics of money laundering—what it is, how it is accomplished, ways to detect it and how thieves hide the money.
In money laundering the fraudster disguises the existence, nature, source, ownership, location and disposition of property derived from criminal activity. Currency is a popular commodity in criminal activity; it is fungible—one dollar looks just like another—and further loses its identity when entering the economic stream. The downside is that currency is bulky and vulnerable to discovery, especially with today’s heightened security. Also, the launderer is hardly in a position to complain to the authorities if it is stolen.
The trick for money launderers—from dishonest businessmen to the drug kingpins—is to deposit currency into financial institutions without drawing attention. If they succeed at this, they greatly reduce their chances of being discovered and can use the money for a variety of purposes. If, on the other hand, alert CPAs recognize the signs of criminal activity, their plans will be foiled.
LEGITIMATE BUSINESS/ILLEGAL MONEY
Fraudsters use two methods to launder
funds in a legitimate business. Overstatement of reported revenues
means that illegal money is mixed with legitimate money, thereby
boosting total revenues. The downside of this method is the
perpetrator must pay taxes on the money. To avoid this, many
launderers make extra payments to themselves in the form of disguised
consulting fees, salaries and the like. Balance sheet laundering
occurs when the thief parks the money in the company bank
account. The problem with this method is that it is easily detected;
the company bank accounts would be overstated by the same amount when
compared with the financial statements. However, balance-sheet
laundering provides one major benefit to the miscreant: The illegal
loot is safely locked away in a bank.
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ON THE ALERT
There are common threads that CPAs should be aware of that have emerged from studying money-laundering schemes.
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Small companies—which typically have fewer
employees and less stringent internal controls—are most
likely to be used as vehicles for money laundering.
Attempting to deposit ill-gotten gains to a large entity,
although not impossible, usually requires too many
conspirators inside the company. 
Banks. White-collar professionals sometimes are used to help launder money. Through investments, trust accounts, funds transfers and tax avoidance schemes, these professionals can manipulate the financial, commercial and legal systems to conceal the origin and ownership of assets. CPAs should be especially alert to offshore transactions that appear to have little economic substance. Additionally, since money launderers gravitate toward a small cadre of lawyers and brokers to accomplish their illegal goals, be wary of professionals with questionable reputations.
Money laundering is a three-step process of placement, layering and integration that is clearly illustrated in Crazy Eddie’s scheme.
A CASE STUDY
Eddie Antar, one
of the most shameless white-collar criminals in the last half of the
20th century, limped onto his latest of many flights from New York to
Tel Aviv, Israel. Stiff and unable to bend, he could barely maneuver
into his first-class seat for the 10-hour ride. Other passengers
probably thought Antar was crippled. The flight attendants were
particularly attentive to his needs.
| But no one on the plane
realized why Antar really was having mobility problems: He had
tens of thousands of dollars strapped to his body, cash that
he and family members had skimmed from their thriving
electronics chain. Even more cash was stuffed in his luggage.
Eddie’s original plan was to cheat the tax man. But after
skimming millions of dollars, he and family members thought of
a better use for the hidden loot: It would be funneled back to
Crazy Eddie’s disguised as revenue. This trick helped boost
the stock price in their IPO, which eventually led to a
financial statement fraud of more than $100 million. Placement. When Antar arrived in Tel Aviv, he immediately went to his luxury hotel. A bellman deposited his heavy bags in the room. Of course, Antar never took his eyes off the man carrying the treasure. Once alone, he locked the door and divided the neatly wrapped bills into stacks small enough to fit inside his briefcase. Then, one briefcase at a time, he hauled the loot to an Israeli bank for deposit. In less than a day, Eddie traded the batches of bulky currency for a dozen deposit slips. |
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The process of depositing the laundered money in banks
is called placement and can be accomplished in several ways.
The simplest method is to add the currency to the revenues of a
cash-intensive business. But another way is to move the currency
offshore, as in Antar’s case. Although some nations and islands have
reputations as havens, having money in nearly any foreign country
greatly complicates tracing it. And that’s exactly what the money
launderer wants. Other popular hiding methods include breaking the
money into smaller quantities in order to evade U.S. banking
requirements that require currency transactions over $10,000 be
reported to the Treasury Department. The smaller sums then can be
deposited in a variety of banks; this is known as smurfing .
Currency can be used to purchase cashier’s checks and money orders
that can be deposited into other institutions. A sophisticated
laundering operation sometimes involves hundreds of banks. CPAs should
be alert to businesses that have a questionable rationale for using
multiple bank accounts.
Layering. Once Antar’s Israeli bank balance was swollen with cash, he came up with a way to dodge the scrutiny of Israeli officials should they inquire on their own or on behalf of American investigators. The money was wire transferred to a bank in Panama, a country then known for its secrecy laws.
From there Antar could transfer the money by wire or by check to any bank of his choosing in the world. The more transfers he made, the more layers he put between himself and the original source of the illicit funds—hence the term layering . A sophisticated laundering operation could have hundreds of layers.
Integration. Eddie Antar eventually wired more than $8 million to Panama from his Israeli bank. He then gradually transferred the funds to the accounts of Crazy Eddie’s Inc., where they were mixed with legitimate sales. This is the process of integration , where ill-gotten gain is returned to the economy disguised as legitimate income.
When Antar returned the money as sales to Crazy Eddie’s, the $8 million of skimmed money boosted the stock price and created more than $40 million in added equity for the Antar clan. Antar later cashed out his shares and left the United States with more than $30 million. Authorities finally caught up with the international fugitive and returned him to the United States, where he served eight years in prison.
Money laundering is a serious and growing problem, despite government efforts to control it. Preventing and detecting crime therefore requires efforts of both the public and private sectors. CPAs can be a major deterrent to the serious and growing problem of money laundering by recognizing its earmarks.
JOSEPH T. WELLS, CPA, CFE, is founder and chairman of the Association of Certified Fraud Examiners and professor of fraud examination at the University of Texas at Austin. Mr. Wells won the Lawler Award for the best JofA article in 2000 and 2002 and has been inducted into the Journal of Accountancy Hall of Fame. His e-mail address is joe@cfenet.com .
| Federal Laws Target
Money-Laundering Crimes Evasion of reporting requirements. The U.S. code prohibits the structuring of transactions for the purpose of evading reporting requirements. It includes a fine of up to $500,000 and incarceration of up to 10 years (31 USC section 5324). Money laundering. These sections of the code prohibit a person from using the proceeds of unlawful activity in a financial transaction with the intent to disguise or conceal the nature, location, source, ownership or control of the proceeds. It also prohibits the transportation, transmission or transfer of funds into or out of the United States if the person knows the funds are the proceeds of illegal activity (18 USC sections 1956 and 1957). Racketeering. The code considers violations of the money-laundering statutes (described above) to be “predicate offenses” constituting racketeering activity under the Racketeer Influenced and Corrupt Organizations (RICO) Act. The statute provides for both civil and criminal actions against violators (18 USC sections 1961-68). Seizures and forfeitures. These code sections provide for civil seizure and forfeiture of property involved in certain crimes including money laundering. It also deals with criminal forfeitures. Source: Fraud Examiners Manual, Third Edition, Association of Certified Fraud Examiners, www.cfenet.com , 1999. |
