The cost of running a compliance function for anti-money laundering and countering the financing of terrorism (AML/CFT) in an organization is far less than the price it may pay for noncompliance. Because of increased regulatory focus, penalties levied affect the bottom line and become a going-concern issue with license suspensions or cancellations. Given the social, economic, and political ramifications of money laundering and terrorism financing, it is becoming more difficult for organizations to consciously ignore AML/CFT compliance. The next 10 years could witness enhanced regulatory compliance across jurisdictions, so internal audit's role in ensuring strict AML/CFT compliance assumes greater importance.
Money laundering is about channeling illegal, "dirty" money through a legitimate means to make it appear as "clean" money within the system. This can be explained in three phases: placement, layering, and integration. In the placement phase, illegal money physically enters into the financial system, such as huge bank account deposits via bank tellers or ATMs. The layering phase involves executing complex transactions with the sole intention of concealing the origin of the funds and diluting the audit trail for further investigations. In the integration phase, the proceeds re-enter the financial system as apparent legitimate funds. Money laundering is a derivative crime; in other words, it is a crime that derives out of another crime. Its nature as a crime depends on the genesis of the funds.
Internal Audit's Role
The money launderer's objective is to convert illegally obtained money into legal tender through inappropriate methods, and in the process avoid the attention of prosecutors or auditors. A clear understanding of AML/CFT helps internal auditors conduct reviews more effectively. At a minimum, internal audit should focus on these areas:
Top management intent.
Conduct interviews with key top management individuals. Internal control questionnaires, checklists, and management letters are commonly used in these interviews. However, also assess the willingness and commitment of top management to protect the organization from the threat of money laundering and terrorism financing. This critical exercise should become the basis for review and the depth of sample coverage.
Understand the business operations of the organization in detail. Without a thorough understanding, auditors will not be able to identify a...