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Crimes, chew'd, swallow'd and digested, appear before us

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D. Murali

KING Lear says, "Tremble, thou wretch, that hast within thee undivulged crimes." In Hamlet, one comes across, "Feats, so crimeful and so capital in nature." And in King Richard II, the Bard writes about "These accusations and these grievous crimes... against the state and profit of this land." Crimes are no new tidings, though every day there is a whole section in newspapers devoted to vile happenings, including the ones that are economic.

What's new, perhaps, is PricewaterhouseCoopers's Global Economic Crime Survey, 2005, covering `3634 respondents in 34 countries'. Almost one in two (45 per cent) of companies worldwide have fallen victim to economic crime in the past two years, an 8-percentage point increase over the previous survey, informs PwC.

There has been a 71 per cent increase in the number of respondents reporting corruption and bribery, a 133 per cent increase in the case of money laundering, and a 140 per cent increase with regard to financial misrepresentation, informs the report about the worldwide scenario.

Impact from fraud perpetrated by senior management can be up to three times more serious than the impact from fraud committed by lower level employees, perceive the respondents. Disturbingly, "the typical perpetrator was male (87 per cent), between the ages of 31 and 40 (38 per cent) and educated to degree level or higher (52 per cent)."

The PwC CEO, Sam Di Piazza, shares this insight: "People in an organisation pick up quickly on how the CEO and other senior executives deal with individuals and situations that may not conform to the ethical code."

Responding to fraud

On the subject of crime and fraud, there are inputs on http://webcast.ey.com (`Thought Center Webcasts' of Ernst & Young), in a page titled `Responding to Allegations of Fraud'. Audit committees are required to investigate a wide variety of issues, including those that arise from within the company for example, `an internal whistleblower alleging financial statement fraud', or from outside. "These investigations frequently are conducted against the backdrop of security class actions, regulatory scrutiny, and potential criminal prosecutions," notes the site.

"Theft in the workplace has evolved beyond light-fingered staff pinching the odd pen or box of A4 paper into something far more catastrophic for companies," is how a story on http://news.bbc.co.uk begins, and it figures top in `recent news' on www.acfe.com, the site of the Association of Certified Fraud Examiners.

"How vulnerable is your company to fraud? Do you have adequate controls in place to prevent it? Find out by using the ACFE's Fraud Prevention Check-Up, a simple yet powerful test of your company's fraud health," reads a page that offers a free CD-ROM.

Money laundering and terrorist financing

Of special interest is a speech titled `Combating money laundering and terrorist financing in China,' by Xiang Junbo, Deputy Governor of the People' s Bank of China (PBC), at a recent `high level seminar' on combating terrorist financing. The five-page file on www.bis.org explains that money laundering "destroys the fairness and equality principle of market economy, disturbs orderly competition, damages reputations and normal operations of financial institutions, and threatens the soundness and safety of financial systems."

More worryingly, it becomes the source of corruption and erodes the social fundamental institutions, says Junbo. Worse still, "money laundering and terrorist financing have interlaced with each other and threatened global security".

Lack of co-operation is one of the fundamental reasons for international communities not being able to respond effectively to money laundering and terrorist financing, notes his speech, drawing from the `UN Report of the Secretary-General's High-level Panel on Threats, Challenges and Change,' a 99-page PDF that you can download from www.un.org/secureworld.

Junbo lists the special features of money-laundering crime in China thus:

Both natural person and legal persons are treated as criminal offenders.

Punishment also covers illegal gains from overseas, upstream criminal acts.

Although there are only four different upstream criminal acts, there are totally 27 different crimes within them. (These include smuggling, trafficking, production of narcotic drugs and illegal possession of psychotropic substances, illegal cultivation of drug plants, organising, leading and participating in mafias, weapon and ammunition smuggling, counterfeit currency smuggling, cultural relic smuggling, precious metal and jewellery smuggling, organising, leading or participating in terrorist organisations and so on.)

Criminal punishments of money laundering include maximum 10-year imprisonment, detention, property confiscation and fines.

An instructive paragraph in the speech is about `administrative methods' in the form of `due diligence, suspicious transaction identification, transaction record-keeping, and cross border capital movements control.' Here are a few examples that Junbo provides:

  • Provisional Rules for Cash Management (October 1988) that stipulates strictly the cash use in circulation.
  • Administrative Rules for Cross-border Transfer of National Currency (January 1993) that forbids transferring and remitting RMB abroad through regular mails without permission. (Now the upper limits of renminbi (RMB) to be taken abroad is 20,000 yuan each time per person).
  • Rules for Authentic Name of Individual Deposit Account (April 2000) that deny the validity of anonymous account existence.
  • Provisional Administrative Rules for Transfer of Foreign Currency (jointly issued in August 2003 by the State Administration of Foreign Exchange or SAFE and the General Administration of Customs) stipulating that people entering China with foreign exchange cash with value over $5,000 should provide written report to Customs, and people travelling abroad with foreign exchange cash with value over $5,000 should apply for permission beforehand.
  • These apart, the PBC issued about two years ago "Rules for Anti-money Laundering Efforts by Financial Institutions, Administrative Rules for the Reporting of Large-Value and Suspicious RMB Payment Transactions and Administrative Rules for the Reporting of Large-Value and Suspicious Foreign Exchange Transactions by Financial Institutions."

    Accordingly, financial institutions should "establish sound internal control system in anti-money laundering, report timely large-value and suspicious transactions (including 46 standards about suspicious reports for domestic and foreign currency transactions), keep records of clients' documents and transactions for at least five years". Interestingly, the central bank is focussing on `scientific and information-oriented supervision of anti-money laundering and effective control of the working cost'.

    In a surprising display of transparency and assurance that the central banker means business, Junbo's speech offers statistics that from April to December 2004, the PBC conducted special examination on anti-money laundering by commercial banks, "punished 72 main reporting banks of commercial banks involving total fines up to RMB 1.7 million yuan due to their incomplete internal control systems of anti-money laundering or misreporting of suspicious transactions".

    The task is high-risk and regulators are on a learning curve. Junbo admits, "The examination accumulated precious experience for supervision over non-banking financial institutions and other high risky areas in money laundering, such as real estate, precious metal and jewellery distribution, and cultural relic auction." He has promised to expand anti-money laundering examination to `securities companies and insurance companies' next year.

    The speech informs that China Anti-money Laundering Monitoring and Analysis Center, aided by a network with 17 commercial banks, gathered more than six lakh reports `of suspicious activities', amounting to $76.92 billion, `covering provinces, autonomous regions and municipalities across the nation'. Since April 2004, the PBC and SAFE have referred more than 1,500 clues to departments of public security at various levels, and helped solve 51 cases, involving $460 million.

    These relate to activities such as "underground banking, overseas gambling, money laundering through investment, smuggling, and illegal purchase and sale of foreign exchange."

    Let me wrap up with this thought from King Henry V: "If little faults, proceeding on distemper, shall not be wink'd at, how shall we stretch our eye when capital crimes, chew'd, swallow'd and digested, appear before us?"

    AccountSpeak@TheHindu.co.in

    (This article was published in the Business Line print edition dated December 8, 2005)
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