BIGGEST BUSINESS ON EARTH

- related to P7 (AAA) of ACCA Examination






Pictures: Food Paradise related to Illegal activities?






HAPPIEST PLACE IN MALAYSIA?

Have you been to Pavillion Mall or Starhill Complex located in Kuala Lumpur’s Golden Triangle? No doubt most of you have and may even say I can get there blindfolded. Understandable as in my opinion its better than Disney World which was dubbed the “happiest place on earth”. I begged to differ, please go to BOTH Pavillion and LOT 10 Mall respective food courts. Both combined has the highest concentration of best food. The operators are carefully selected from the region, namely Malaysia, Singapore and Hong Kong. Eat and be Happy. Heard of “a satisfied filled man is a happy thrilled man”. The happiest place!

After sumptuos fill, go window shopping in the luxury malls and you will notice goods displayed which range from Gucci, Louis Vuitton, Prada and BVLGARI (don’t know how to pronounce this brand). Buy a Gucci watch and it will set you back a cool US$8000 a piece. Equivalent to a year’s pay for a junior auditor! Who would buy them? Some people, you may say, but is there enough volume sales to cover their high expense? There is one outlet that exclusively sells ‘scarf’ and the asking price is US$550 a piece, and that is the cheapest! For a cloth, US$550?

It may not surprise you that some of these outlets are not be in retail business catered to society but really is related to illegal activities such as drug trade. How? Lets look at the business first.

ILLEGAL DRUG TRADE – BIGGEST BUSINESS ON EARTH
The illegal drug trade is a global black market consisting of the cultivation, manufacture, distribution and sale of illegal controlled drugs. The UN report said the global drug trade generated an estimated $321.6 billion in 2007 and close to US$500 billion in 2008. Most jurisdictions prohibit trade, except under license, of many types of drugs by drug control laws. In Malaysia, found with drugs like cocaine, marijuana and related drugs, the sentence is death by hanging!

The illicit drug trade operates similarly to other underground markets. Various drug cartels specialize in the separate processes along the supply chain, often localized to maximize production efficiency and minimize damages caused by law enforcement. Depending on the profitability of each layer, cartels usually vary in size, consistency, and organization. The chain ranges from low-level street dealers who may be individual drug users themselves, through street gangs and contractor-like middle men, up to multinational empires that rival governments in size.

Consumption of illegal drugs is widespread globally. While consumers avoid taxation by buying on the black market, the high costs involved in protecting trade routes from law enforcement lead to inflated prices.

MONEY LAUNDERING – MAKING MONEY CLEAN
One way the government stems the trade is to prohibit drug traders from enjoying the ill-gotten gains. Since they are illegal, traders cannot declare them for taxation purpose or openly purchase goods and services. So they need a way to ‘legalise’ their funds leading to Money Laundering which ACCA Code of Ethics define it as:
“Criminals conceal true origin and ownership of funds from criminal acitivities, allowing controls over proceeds and ultimately cover their income source.”

Money laundering is the process of creating the appearance that large amounts of money obtained from serious crimes, such as drug trafficking, originated from a legitimate source. It is a crime in many jurisdictions with varying definitions.

HOW IS MONEY LAUNDERING DONE?
As clothes go into laundry turns out clean, similarly money too can be clean with methods like:

Cashing up – Smurfing
A business taking large amounts of small change each week (e.g. a convenience store) needs to deposit that money in a bank. If its deposits vary greatly for no obvious reason this can draw suspicion; but if the transactions are regular and roughly the same the suspicion is easily discounted. This is the basis of all money laundering, a track record of depositing clean money before slipping through dirty money.

Captive business using Shell Companies
Another method is to start a business whose cash inflow cannot be monitored, and funnel the small change into it and pay taxes on it. But all bank employees are trained to be constantly on the lookout for transactions that seem to be trying to get around reporting requirements. To avoid suspicion, shell companies should deal directly with the public, perform some service (not provide physical goods), and have a business that reasonably would accept cash as a matter of course. Dealing directly with the public in cash gives a plausible reason for not having a record of customers. It is of course also possible to invent customers, purely for the purpose of accepting money from them.

Other methods in brief:
 Offshore banks that gives anonymity (late President Marcos of Philippines stashed US$20billion in Swiss Banks)
 Alternative Banking – “Quick Money” (Fai Chin) schemes based on trust amongst Chinese Community.
Professional crooks will likely use a combination of the above.

HOW DOES IT AFFECT AUDITORS?



It’s a crime! Even if you as auditors unwittingly overlook the Money Laundering schemes in the process of your professional work on clients. Yes,Ignorantia juris non excusat (ignorance of the Law is no excuse!) Crimes give rise to prosecution and jail term! In my P7 (ACCA- Advance Audit and Assurance), you will know:
= how to detect Money Laundering?
= what actions to take & who to tell in the firm?
= identify and process of reporting to authorities?

= But wait a minute, can auditors tell on clients to authorities in view of the strict confidentiality code?

Listen carefully to my P7 lectures in Kasturi School of Accountancy, Kuala Lumpur (web link: http://www.ksacitycampus.com/), for you don’t want to stay in high security accommodation, courtesy of State Government!

PS: Money Laundering topic carries 4-10 marks in P7 (ACCA) examinations.