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Challenges in dealing with

Fraud, Corruption and Money


Laundering.
by

Prof. Majed Rashid


Allama Iqbal open University
Islamabad

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Fraud ,Corruption and Society (1)

1. Chances of frauds and corruption in any society


curtails the knowledge (technological) and human
resource development. This leads to ‘ Brain drain’
and a perpetual vicious circle of hopelessness and
chaos.

2. Societies able to keep these curses in manageable


proportions remain vibrant and provide
environment for sustainable growth and knowledge
economy that attracts talent. Prevalence of
corruption hinders institution building, stability,
technological growth and competitiveness in the
medium and long term.
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Fraud, Corruption and Society (2)

3. In such societies there could be


individuals with ‘excellence’ but
knowledge economy (technological
development) and institutions being
essential for stability do not emerge.

4. In essence it a national problem,


however, in the post WTO, 9/11 world it
is also a challenge for the whole world.

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Fraud, Corruption and Society (3)

4. In the past when societies were


‘isolated’, corruption in one country or
society only had local effects. This is not
the situation now. In the new global
village, there has to be level playing field
for ‘all’ residents. If not, then problems
(though different in character) will arise
for everyone.

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Economic Development & Poverty
Alleviation (1)
Recent history of economic development has
revealed that ‘Economic Development’ and ‘Poverty
Alleviation’ are not always concurrent. There could
distortions in theoretical ‘Trickle Down Effect’.
There had been instances where the results are
different. One of reason for this distortion is
‘corruption’ in the system that leads to
disproportion or inequitable flow of the results of
economic development .

This is the phase where ‘corruption’ pervades into


some form of ‘extortion’.
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Economic Development & Poverty
Alleviation (2)

Primary reason for distortion is the lack of


institutional development in the sectors of banking,
taxation, corporate regulations, including
governance and others allied fields that leads to the
growth of environment conducive for the promotion
of ‘corruption’ resulting in improper (inequitable)
dissemination of the results of growth.

If this situation persists for a long duration then it


would ultimately result in curtailment of the pace of
economic growth that enhances poverty level or
slows the pace of poverty alleviation.
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Economics, terrorism and security

In post 9/11 scenario issues of ‘terrorism’ and


‘security’ have been intermingled.

Terrorism is an international phenomenon that may


not relate to level of economic development or the
security state of society. Nevertheless, it has a
direct relation with fraud, corruption and money-
laundering activities. This provides a breeding
ground both for money and human resources
required for such activities.

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National and International Agenda (1)

Anti-corruption and anti-money laundering require actions


both on national and international levels.

There are empirical evidences that, at times corruption in


the developing societies arise on account of economic
interest of the persons and entities in the developed world.

There are supply and demand sides of the transaction.

Commissions and gifts usually emanate from the developed


world. There is a view that big ticket corruption issues only
arise where a deep pocketed client exists in the developed
world.

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National and International Agenda (2)

In the current international scenario, as emerging in


post 9/11, continuation of such practices could have
very serious consequences. This requires an
international strategy for ‘anti-corruption’.

There had been development in the field. However, the


pace is not encouraging. Identifying the ‘challenges’ is
the theme here.

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National and International Agenda (3)

On our part, accounting bodies on national,


regional and international levels have by and large
been proactive in their role in this field. Appropriate
guidelines, standards and study materials on the
subject including code of ethics, auditing standards
on fraud etc. have been released. However there is
a need for wider involvement of other professions
and stakeholders in this movement.

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National and International Agenda (4)
Unfortunately till now only 30
country’s ratification has been
received for the ‘UN Convention
Against Corruption’ signed in Mexico
in December 2003. The report
prepared in New Zealand has provided
astonishing low level of awareness on
the convention among the business
community.
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National and International Agenda (5)

The international approach for anti-corruption


requires concurrent strong national strategies with
conviction.

In the developing world the issue of corruption is


directly related to institutional development and
capability and capacity of governance.

This requires necessary support from international


development institutions and appropriate ‘support’
and ‘audience’ in the WTO deliberations.
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National and International Approach (6)

There at WTO we talking ‘at’ each other rather than with


each other. This need to stop. The real issue is
perceived economic insecurity and the deficit of trust.
Institutional growth in developing world would
ultimately result in win-win for both the parts of the
world.

Challenges for the respective nations even greater.


International support would could only provide funding
or technical support. Real correction can only arise with
is ‘in-house’ (national) capacity building in governance
and regulatory framework.

Real challenge is lack of governance framework. This


deficiency breeds corruption.

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National and International Agenda (6)

The present state of affair of ‘States’ in the developing


world is well described by the Indian writer Mr. Arun
Shouri as:

“Administration degenerates into notings on files.


Regulations entangle regulations. Institutions, set up to
solve problems, become problems. Even matters that
endanger national security lose their way in courts, get
buried in files. Enterprises become havens of patronage,
slovenliness. A public sector least accountable to the public,
becomes the truly private sector of ministers, officials. The
way out: An Enabling state the first requisite .”

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National and International Agenda (7)

National anti-corruption strategy to


involve:

1. Increasing transparency in public procurement


2. Increasing access to information
3. Ensuring the independence and transparency in
judiciary
4. Enhancing public sector integrity through codes
of conduct and conflict of interest rules
5. Protection for whistleblowers
6. Improving transparency in financial services
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Governance and corruption (1)
Governance in a country’s perspective
has been defined to measure the level of
development for the following aspects:

1. Voice and accountability


2. Political stability and of lack of violence
3. Government effectiveness
4. Regulatory quality
5. Rule of law
6. Control on corruption

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Governance and Corruption (2)

In this broader framework control on corruption is


one part of the overall governance indicators
however in societies where there are
shortcomings in the first five elements whole
economic and social fabric is disturbed.

Economic activities have to continue in usual


course in every society lack of first five indicators
result in multiplier effect in the acceleration of
corruption.

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Governance and Corruption (3)

There is no short term or easy solution. In the end, there


has to be ‘Home Grown’ strategy based on international
best practices. The minimum compulsory requirements are
(1) human resources development, (2) privatization
and (3) smaller self-sustaining governments.

Furthermore there has to be a consensus as to the policy


that ‘Private sector’ growth with public sector being a
facilitator only would prevail. Reins to manage the system
are (1)proper regulatory framework and (2) effective
fiscal system ensuring equitable distribution of wealth.
This is the only workable economic model for the future
world.

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Governance and Corruption (4)
Ingredients in designing anti-
corruption strategy includes:

1. Driven by political will and local ownership


2. Holistic and balanced
3. Need based, targeted and sequenced
4. Resource and capacity-based
5. Measurable
6. Transparent, non-partisan and mindful of
relevant conflict of interest issues
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Corporate Governance and its
Challenges (1)

Reduction in the role of government with lesser controls


and regulations and increased role of corporate bodies
requires proper governance models for the corporations.

Studies reveal that private sector corporations would hold


major parts of earning assets of the world and availability of
the funds for the philanthropy leading to a support for
health, education and human developments in future.

This requires proper corporate governance procedures and


practices (not necessarily codes in every sense) otherwise
the results could be worse than a a ungoverned public
sector. That sector is any way ‘accountable’ to a larger
audience.
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Challenges for Corporate
Governance (2)
The challenges for corporate governance are:

1. Under resourced regulators

2. Profit versus values: corporate incentives and controls

3. Uninterested inactive shareholders

4. Lack of bottom up communication

5. Weaknesses of the board

6. Lack of reliable audits

7. One size fits all governance codes


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Fraud Detection and Regular
Audit
Audits are perceived to be conducted to detect
frauds. This is the view of an ordinary man on the
street. This implies in a common mind that an
audited financial statement has been ‘certified’ to be
free from fraud and corruption.

For us this is not the case. The scope limitation,


opinion versus certification and extent of checks are
relevant and appropriate distinctions, however these
remain technical matters for general purposes.

However in future within the context of the matter


identified earlier certain ‘extensions’/ additions in
work to be conducted and correction in perception is
required.

We understand the resistance faced at the time of


auditing standards on fraud however that bridge
need to be crossed.

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Anti-money laundering
Regulation and implementation
(1)
Money laundering is defined as converting
criminal income into assets that cannot be
traced back to the underlying crime. It is
conventionally divided into three stages;
the placement of funds derived from
crime, the layering of those funds in order
to disguise their origins and the
integration of the funds into the
mainstream economy.

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Anti-money laundering
Regulations and implementation
(2)
Anti-money laundering (AML) is an activity
which prevents or aims to prevent money
laundering from happening. Such activities
include introduction of a requirement for
the financial institution to identify their
customers, maintaining records of the
customers, cooperation with the law
enforcement agencies and training of the
staff with respect to laws etc the breach of
which result in money to be laundered.
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Anti-money laundering
Regulations and implementation
(3)
Anti-money laundering strategy suffers from primary two
challenges:

a) Regulators Gaps:

No International Agency
Hedge Fund business and derivatives having
complex structures encouraging layers; etc.

b) Communication Gap:

Lack of feedback
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Lack of publicity
Anti-money laundering
Regulations and implementation
(4)

There is a very clear link between the


profession and the efforts for AML however its
needs to remembered that:

“it would be completely unfair to expect


professional accountancy firms to be unpaid
police and customs officers”

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Anti-money laundering
Regulations and implementation
(5)
This efforts mainly relates to financial institutions
and fiscal authorities. Nevertheless there are
serious issues with regard to the effectiveness of
the AML regulations; The conclusion derived by
one the Senior Partner of law firm are very
relevant:

“Big money laundering is conducted by very


sophisticated people-will always find ways round
the regulations. The way to stop them is to make
money laundering less attractive.
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Anti-money laundering
Regulations and implementation
(6)
If the effectiveness of AMLR is improved
then money laundering will be increasingly
deterred, prosecution and assets seizures
will become more frequent and can be
made more visible. If these improvements
happen then the cost of implementing
AMLR will be perceived as less of a burden
and more of an acceptable cost of doing
business in a modern , civilized society
and the world.
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The future course of action
International and regional coordination and cooperation in anti-corruption
drive

Capacity building on global and regional basis

Review of regulatory framework in tax heavens and substitution of the


same with the tax friendly jurisdictions

Development of accounting standards for non-publically accountable


entities

Recognition of proper compensation for services for the professional in


areas other than ‘attestation

Close coordination between corporate, banking and fiscal regulators,


judicial systems and the profession on national and international levels

International public debate and publicity on issues of corruption both on


demand and supply sides.

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Conclusion
Achievement of Millennium Development Goal requires
corruption free world.

Islands of corruption represent a malignant tumor in one


part of the body that could effect the whole system and
endanger life.

The cost associated in curing the disease may seem too


high in relation to the problems being faced at the early
‘stage of disease’.

However if a diagnosis has been done, efforts for cure have


to be undertaken at every cost.

Thank you
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