Money Laundering Typology through Trade Mispricing

"Trade Mispricing" is a common money laundering typology often used by merchandisers which aims to escape taxes of a home country through the formation of "subsidiaries" in other countries.  Tax evasion is a predicate offence, and the use of such evaded taxes constitutes money laundering.  Also known as transfer pricing manipulation or fraudulent transfer pricing, trade mispricing involves trade between related parties at prices meant to manipulate markets or to deceive tax authorities.  Typically, as an illustration, Company ABC manufactures/assembles its product in three different subsidiaries - Subsidiary 1 in the home country; Subsidiary 2 in an offshore location and Subsidiary 3 in a "final market destination" country.  Through related-party transactions, Subsidiary 1 sells its products to Subsidiary 2 (a tax haven) at a rediculously low price resulting in low profits being recognized by the company (hence much lower tax being paid to the home country).  In its effort to maximise profit within a tax-free location of Subsidiary 2, it sells it products to Subsidiary 3 at a much inflated price.  The end results being, the merchandisers "strategically" deflate profits to evade taxes in their home countries and to inflate profits in tax haven locations. It is nonetheless, a money laundering activity and should fall within the anti money laundering and counter financing of terrorism legislation.  It has been reported that such money laundering typology is quite common and should be stopped at all costs.  Merchandisers and manufacturers are potential players of transfer pricing manipulation. The introduction of the Goods Service Tax or GST would hopefully helps to reduce trade mispricing in the future.  A recent initiative by the Transparency International is the establishment of the "Financial Transparency Coalition"  where the parties (merchandisers) conducting a sale of goods or services in a cross-border transaction sign a statement in the commercial invoice certifying that no trade mispricing in an attempt to avoid duties or taxes has taken place and that the transaction is priced using the OECD arms-length principle. 

Money Laundering Typologies

The Accounting Research Institute thanks ASP Mohd Noor Firdaus from the Royal Malaysia Police for sharing his AMLA-related investigations and experiences with students from the Master in Forensic Accounting and Financial Criminology program of Universiti Teknologi MARA. The class was told that one of the most important competencies that investigating officers need to know is the ability to develop typologies. Typologies refer to the methods or trends used by criminals to launder proceeds of criminal activities and finance illicit activities. In most cases, the methodologies are in constant evolution.  ASP Firdaus shared two famous typologies.  Firstly, the use of the traditional "Hawala" system remains a popular tool used by money launderers for transfer and receipt of funds.  Without "actual movement" of cash, funds are transferred from one country to another. The use of  "Contra Transactions" often makes audit trail difficult to do. Sometimes, such cash movement is settled through trade exchange and "cash contra".  Premised on the concept of trust, some "net settlement" may cover a long period of time. What makes them distinct from other money transmitters is their use of non-bank settlement methods. Secondly, money launderer criminals seek the advice or services of legal and accounting professionals to help in laundering criminal assets. As reporting institutions, it is crucial that these professionals be aware of their responsibilities to mitigate money laundering activities by their clients. Three specific responsibilities are: (i) to know their clients by conducting due diligence, (ii) to maintain full record of their tasks for at least six years and (iii) to submit "Suspicious Transaction Report or STR" to the Central Bank in the event that they become suspicious that their clients might be involved in possible money laundering activities.

Exploring AMLATFA 2001

AMLATFA 2001 is an Act or legislative provision that came into force on 15 January 2002.  Three main important objectives of the Act are:(i) to provide for the offence of money laundering, (ii) to specify measures to be taken for the prevention of money laundering and (iii) to provide for forfeiture of property derived from, or involved in, money laundering.  Today, the new cohort of the Master in Forensic Accounting and Financial Criminology made their first in-class presentation by discussing legislative provisions related to anti money laundering and anti terrorism financing in Malaysia. In essence, example of predicate offences in money laundering include the following: corruption, bribery, child pornography, CBT, forgery, human trafficking, theft, extortion, frauds, fraudulent manipulation of stock exchange transactions, possession of counterfeit money, tax evasion and money incremental scheme. The group had also highlighted different categories of reporting institutions which include all financial institutions (conventional and Islamic banks), insurance companies (including takaful operators), money changer, real estate agents, casinos, precious metal dealers and professional lawyers and professional accountants.

Islamic Financial Criminology - Research Outcome for 2014

In its recent strategic meeting, researchers at the Accounting Research Institute (ARI) discussed on publication strategy for 2014.  Premised on ARI's niche research agenda in Islamic Financial Criminology, ARI publications  for 2014 will focus on four research clusters: (i) Shariah Governance , (ii) Corporate Integrity & Ethics, (iii) AML/CFT and (iv) Fraud Risk Indicators and Methodologies.  ARI researchers will specifically target Q1 and Q2 journals for their publications.  Apart from impact journal publications, researchers had also discussed on publishing cluster-based research books with renowned international publishers.  Another strategic discussion was on producing innovative products that could possibly be used by stakeholders.  As such, ARI researchers will be participating in the forthcoming IDEX 2014 and ITEX 2014 innovation and Invention competition 

A Day at Brahim's Airline Catering

At an effort to enhance corporate integrity at workplace, Brahim's Airline Catering recently launched its corporate's Code of Ethics document.The company signed the Corporate Integrity Pledge (CIP), an integrated initiative with PEMANDU, the Malaysian Anti-Corruption Commission (MACC) and the Malaysian Institute of Integrity (IIM).  CIP is a document that allows a company to make a commitment to uphold the Anti-Corruption Principles for Corporations in Malaysia. By signing the pledge, a company is making a unilateral declaration that it will not commit corrupt acts, will work toward creating a business environment that is free from corruption and will uphold the Anti-Corruption Principles for Corporations in Malaysia in the conduct of its business and in its interactions with its business partners and the Government. Three researchers from the Accounting Research Institute (ARI) have been invited to share various research instruments that have been developed at the Institute to measure corporate integrity practices at workplaces.  Prof Normah explained the concepts of corporate integrity and how to effectively used an instrument known as Corporate Integrity Assessment  Questionnaire  (CIAQ) for the company.  Associate Professors Dr Zuraidah and Dr Jamaliah developed case study typologies for "gifts giving" and "ethical decisions".

ARI Sharing Session at Brahim's Airline Catering Integrity Week

The Accounting Research Institute (ARI) thanks Brahim's Airline Catering for inviting us to participate in its Integrity Week event on 19-21 March 2014. The event which will be held at its corporate office in Sepang will specifically discuss integrity policy related to gifts and entertainment.  As the company has recently signed the Corporate Integrity Pledge (CIP) with the Malaysian Anti Corruption Commission, Brahim's Airline Catering is also very keen to know more about ARI's work on Corporate Integrity System Malaysia (CISM) with the Malaysian Institute of Integrity (IIM).  CIP is a document that allows a company to make a commitment to uphold the anti-corruption principles in Malaysia. By signing the pledge, a company is making a unilateral declaration that it will not commit corrupt acts, will work toward creating a business environment that is free from corruption and will uphold the Anti-Corruption Principles for Corporations in Malaysia in the conduct of its business and in its interactions with its business partners and the Government. On the premise that corruption is the direct result of "lack of integrity" of individuals and/or organizations, CISM is an instrument developed to measure and assess integrity practices at workplaces.  Two Brahim's officers - Mr Hisham and Mr Mahat visited ARI's office to discuss possible programs to be offered during the integrity week event.  Three ARI researchers - Prof Normah, Associate Prof Dr Jamaliah and Associate Professor Dr Zuraidah have been invited as speakers at Brahim's Integrity Week on 19-21 March 2014.  

Courtesy Visits to TH and Bank Islam

In an effort to promote Accounting Research Institute (ARI) and its niche research agenda in Islamic Financial Criminology, two researchers, Prof Dr Normah Omar (ARI Derector) and Dr Belo (ARI Post Doctoral Scholar)  visited two prominent organisations - the Hajj Pilgrimage Board or  Tabung Haji (TH) and Bank Islam Malaysia.  At LUTH, the duo met up with Dato' Latifah, the company's Chief Integrity Officer.  Discussions have included the possibility of TH to participate in the Corporate Integrity System initiative with the Malaysian Institute of Integrity (IIM) and staff training program on forensic accounting.  At Bank Islam Malaysia, Prof Normah and Dr Belo met up with Mr Nazeri, head of the Shariah division.  Similarly, discussions have focused on the bank's possible participation in the Corporate Integrity System program with IIM. The two meetings have been successful.  There's a lot of opportunities for ARI to collaborate with both companies in the near future.  The next step is for ARI to submit training and research proposals.

Corporate Integrity 2014

The Accounting Research Institute (ARI) congratulates two corporations: Amanah Raya Berhad and Celcom Axiata for sharing their experiences after undergoing the  Corporate Integrity System Malaysia (CISM) assessment in 2012. Interestingly, both companies have taken steps to improve their integrity initiatives at workplace. Premised on the earlier assessment results, Amanah Raya Berhad has increased its integrity infrastructure by appointing more "integrity ambassadors" whose main responsibility is to create integrity awareness.  The company has also embarked on various research projects on integrity and ethics.  Celcom on the other had has created the post of  "Chief Integrity Officer" for the company.  To improve integrity communication, Celcom has embarked on various online campaigns and video clippings on its intranet platform.  The sharing session was made by both  companies during a recent half day roundtable discussion with new/prospective assessors at the Malaysian Institute of Integrity (IIM) office in Jalan Duta, Kuala Lumpur.