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									Following the Money
Laundering Trail
JIM WARDELL




18   perspective Summer 2002
FOLLOWING THE MONEY LAUNDERING TRAIL




    • Forensic accountants look beyond the
      numbers, analysing and delivering clear,
      accurate and unbiased reports reflecting
      the results of their investigation.
    • Money laundering is a multi-million dollar
      global business with estimates of
      US$1.5 trillion being laundered annually.
    • The Law Kin Man drugs case, the first
      conviction for money laundering in Hong
      Kong, was the biggest money laundering
      case brought to trail in the world in 1995,
      according to the US State Department.
    • A careful and thorough forensic investi-
      gation revealed the methods Law Kin
      Man used to launder and hide money
      obtained from the illegal drugs trade.
    • The dark side of advancements in
      technology is an increasing number of
      sophisticated fraud and money laund-
      ering schemes. Therefore, it is crucial
      that accountants keep abreast of
      technological developments.




  “They look upon fraud as a greater crime than
  theft, and therefore seldom fail to punish it with
  death. For they allege that care and vigilance,
  with a very common understanding, may
  preserve a man’s goods from thieves, but
  honesty has no fence against superior cunning.
  And since it is necessary that there should be a
  perpetual intercourse of buying and selling, and
  dealing upon credit, where fraud is permitted
  and connived at, or has no law to punish it, the
  honest dealer is always undone, and the knave
  gets the advantage.”
  Gulliver’s Travels by Jonathan Swift.

  Forensic accounting is the integration of
  accounting, auditing and investigative skills to
  form the basis for discussion, debate and
  ultimately an opinion.

  Common uses for forensic accounting include:
  • Fraud investigation – criminal proceedings
    involving the use of accounting expertise


                Summer 2002 perspective         19
• Analysis of financial statements and support          enforcement agencies to trace those proceeds              effect on 1 December 1989. Anyone willingly
  data – opinion on accounting and auditing             back to the original criminal activity and the            involved in, or facilitating a transaction with an
  standards and practices                               criminals involved. It is a multi-million dollar global   individual, knowing, or having reasonable
• Business economic loss – professional                 business with estimates of US$1.5 trillion being          grounds to suspect, that the individual was
  negligence, business interruption, business           laundered annually. Legitimacy is the ultimate            involved in trafficking in illegal narcotics, was
  damage claims                                         aim of the money launderer.                               committing an offence. The banking community
• Business valuation – shareholders and                                                                           had a duty to report any transactions they viewed
  partners disputes, income tax matters,                LAW KIN MAN’S CASE                                        as suspicious.
  contract disputes, patent infringements               One of the most memorable cases I have worked
• Insurance and personal injury assessment –            on was the drugs case involving Law Kin Man               THE FORENSIC ACCOUNTANT’S ROLE
  property damage claims, loss of income                which resulted in the first conviction for money          Australian authorities later became aware that
  evaluation, personal injury claims, motor             laundering offence in Hong Kong. It was stated            assets in Australia had been purchased with
  vehicle accidents                                     by the US State Department as the biggest                 funds remitted from Hong Kong. The authorities
• Matrimonial disputes – tracing, locating and          money laundering case brought to trail in the             in the US had evidence that Law was trafficking
  evaluation of assets                                  world in 1995, and I was engaged as the                   in drugs in the US in 1987. What was needed
• Insolvency – investigations of transactions           Prosecution’s expert witness.                             was evidence that the money in the accounts in
  made by insolvent entities, debtor and                                                                          Hong Kong in December 1989 was sourced
  creditor disputes, business reorganisation            The investigation began where customs officials           from that drug trafficking in the US in 1987.
                                                        in New York seized a shipment of over 1,000kg
Forensic accountants are also trained to look           of heroin from Thailand. As a result of the               I was initially asked by the Hong Kong Attorney
beyond the numbers and deal with business               seizure, indictments for drug trafficking were            General’s Office to spend two weeks investi-
reality. Once the evidence has been gathered,           filed in the US against a number of individuals,          gating Law’s financial affairs and to assess
their responsibility is to analyse and deliver clear,   including Law Kin Man.                                    whether it would be possible to trace the source
accurate and unbiased reports reflecting the                                                                      of the money uplifted from his bank accounts
results of the investigation. A forensic account-       Law was later arrested by Hong Kong police                after his arrest. Working over Christmas, my
ant’s report is prepared with the objective of          when entering Hong Kong and was subsequently              initial report suggested that the exercise was
presenting evidence in a professional and               extradited to the US where he pleaded guilty to           possible, and a mammoth investigation
concise manner.                                         one count of trafficking in heroin.                       commenced.

Forensic accountants can be engaged in public           The arrest of Law provoked the interest of                Teams of accountants under my control were
practice or employed by insurance companies,            government authorities in the US, Hong Kong               dispatched to many different bank branches to
banks, police forces, government agencies and           and Australia. In Australia, the National Crime           wade through thousands of banking documents,
other organisations.                                    Authority was already aware that Law’s ex-wife,           in an attempt to obtain evidence establishing
                                                        Deborah Chun Kam-fung and a company                       the flow of money into and out of Hong Kong.
Bear in mind that we are not lawyers. We are            controlled by her, Bipati Pty Ltd, owned                  Every document supporting each transaction
simply here to aid the courts and clients in            substantial assets in the country with little             uncovered had to be logged and notified to the
navigating financial issues. Essentially, the           apparent source of income. As a result of                 police for later seizure as evidence. When the
forensic accountant is not being paid to support        investigations conducted in Australia it became           case went to trial, in excess of 25,000 such
client’s case, but to develop an independent            apparent that these assets had been purchased             documents were eventually presented as
opinion and assist the courts.                          with money remitted from banks in Hong Kong.              evidence.
                                                        Under section 82 of the Commonwealth
When providing forensic accounting services,            Proceeds of Crime ACT 1987, if the Australians            My investigation uncovered a complex web of
the accountant will learn how fraud and money           could show that the money used to purchase                bank accounts, share trading and bogus
laundering are commonly committed.                      the assets was sourced from drug trafficking,             companies, through which Law had laundered
                                                        they had a case.                                          his money in Hong Kong. In addition to the
Money laundering is the means by which the                                                                        original 20 accounts disclosed to the police by
proceeds of crime are given a new identity in           In Hong Kong, the Drug Trafficking (Recovery              the banks, more than 360 other bank accounts
order to confuse and defeat the efforts of law          of Proceeds) Ordinance 1989 had come into                 were uncovered in the names of more than 110



20     perspective Summer 2002
                                                                                                     FOLLOWING THE MONEY LAUNDERING TRAIL




individuals and companies, all controlled by Law,   LAUNDERING THE MONEY                                 For reasons that never became clear, however,
though none of these was in his own name. The       Any money launderer is faced with a fundamental      Law ceased using this route to hide the trail of
thousands of transactions, from the cash gen-       problem. The sale of drugs invariably yields large   the money after 1987.
erated by US drug sales were deposited in the       amounts of cash in small denominations. With
Hong Kong bank accounts.                            no legitimate business front generating the          CONCEALING THE TRAIL
                                                    funds, the launderer is faced with how to get        Once the funds were in his bank accounts in
I was able to establish a link between cash         the funds into the banking system without            Hong Kong, Law was able to manipulate them
remitted from the US to Hong Kong during the        arousing suspicion. Law used a variety of            with ease in an attempt to hide their source.
key year of 1987.                                   methods to overcome this problem.
                                                                                                         The funds were initially paid into accounts in the
My investigation further revealed that the extent   Thousands of cheques and money orders of             names of numerous fictitious individuals, opened
of Law’s deposits with his bank had meant that      amounts below US$10,000 were bought. This            specifically for the purpose. These accounts
he was an exceptionally valued customer. In fact,   avoided the requirement of US banks to report        were often opened and closed in a matter of
certain bank managers allowed him to open bank      any purchases over this amount. The purchases        weeks with little or no supporting docu-
accounts with little other than a name. They        were made at numerous banks across New York          mentation, after handling single transactions.
allowed him and those assisting him to operate      State – almost a full-time job for the individuals   From here the funds were transferred to other
his accounts using only signature stamps and        concerned. Once purchased, the cheques and           ‘main line’ fictitious accounts where they were
they gave him preferential interest rates. They     money orders were couriered to Hong Kong and         placed in fixed-term deposits.
even gave him the keys to a desk and computer       paid into Law’s bank accounts.
on which he could work at one of the branches.                                                           Once the funds were in these fixed deposits,
All the bank officials who gave evidence stated     Cash was sometimes taken directly to Hong            Law moved them around the banking system
very clearly that they had no idea that Law’s       Kong and paid into Law’s bank accounts. In one       through a maze of transactions. Deposits were
money came from drug dealing. They believed         instance, one of the two men later convicted in      merged, divided, translated into new currencies,
that the money originated from gambling or from     Hong Kong paid in approximately US$2.5 million       uplifted and renewed to different deposits and
Chinese restaurants in the US and the laundering    in cash in a single transaction. The branch had      accounts, at different branches, on a regular,
was done in order to hide the proceeds from         to close for the day to count the money which        sometimes daily, basis. This was all an attempt
the US tax authorities.                             was in small denominations.                          to confuse the trail leading to their source.

It became apparent that bank documents were         In 1987, at the suggestion of an international       We discovered still further techniques employed
falsified to hide the source of the monies.         banker, Law purchased a Liberian company,            by Law. Large loans were drawn down and
                                                    Wallon Trading. He then set up a facility in the     repaid days later. Stocks and shares were
Having established the nature and complexity        name of Wallon with a remittance company in          bought using funds from an account in one
of the money laundering operation set up by         the US. Large amounts of US cash were paid           fictitious name, then held in a different name
Law, I compiled and submitted more than 20          into the Wallon account with this remittance         and sold with the funds remitted to an account
statements to the court. These comprised            company, which was told that the money was           in yet another name. Law was even able to use
detailed narrative descriptions of each of the      from wealthy individuals in politically unstable     the accounts of real individuals to launder his
transactions involved and flowchart repre-          countries in Asia. From there the funds were         funds. He was introduced to individuals who
sentations of the money flows.                      transferred to Wallon’s account with a bank in       needed his money in their accounts to use as
                                                    New York. All of these transactions were             security for trade financing for their own
When the investigation was completed, a year        supported by appropriate documentation and           business.
after Law’s arrest, 25 of these flowcharts had      appeared to be legitimate.
been prepared. The seven charges brought                                                                 THE TRIAL
against the defendants in Hong Kong were            Once these funds were in the banking system it       As a result of the weight of evidence amassed
supported by six flowcharts and 13 statements       was then a simple matter to transfer the funds       in Hong Kong, Deborah Chun and Bipati Pty Ltd
describing more than 1,100 transactions. The        by telex to Hong Kong where they were                pleaded guilty before the case went to trial in
15 charges brought in Australia were based on       transferred to Law’s accounts. We discovered         Australia.
seven additional statements and 15 additional       that more than US$12 million flowed into Hong
flowcharts.                                         Kong through the Wallon accounts during 1987.        At the request of the barrister putting the case



                                                                                                                       Summer 2002 perspective         21
for the crown prosecution, I was in attendance      licenses to have anti money laundering policies.      schemes which exist today. With the advance-
at court on a daily basis for the whole trial. I    They have raised and maintained high level of         ment of technology, they are becoming more
was asked to provide constant analysis of the       awareness for suspicious transactions. This           and more easily executed as many fraudsters
evidence being given in court, to assist with the   means transactions which are inconsistent with        today are computer literate. The Internet may
preparation of the huge volume of docu-             a customer’s known legitimate business or with        be used for research into criminal techniques,
mentation being presented to the jury, and to       their personal or normal business activities.         security counter-measures, to incorporate a
continually update earlier statements as new        Other clues could be found when there are             company, to direct funds, and to identify and
information came to light for the first time from   sudden changes in settlement details, source          hack into businesses with inadequate security
the witnesses giving evidence.                      of finance, destination of proceeds, source of        measures.
                                                    instructions, transfers to or from apparently
The trial was not limited to Hong Kong. Evidence    unrelated parties, or lack of face-to-face contact.   We, as professional accountants, must keep up
was also heard twice in Singapore, in Los                                                                 with the technological changes and maintain a
Angeles and in New York. In the US, Law himself     Front line bank staff are issued with guidelines      proper level of professional scepticism and risk
was questioned at length only to take refuge        and are trained to detect and report suspicious       awareness at all times. We must behave with
under the Fifth Amendment and refuse to             cases to a committee of senior bank executives.       impartiality and not have a conflict of interest.
answer.                                             Immediately after September 11th, as part of a
                                                    massive forensic accounting exercise, financial       It must be remembered that expert witness is
When I was eventually called to the witness box     institutions were asked to check their records        there to assist the court.
in September 1995, I gave evidence for over         against names and transactions suspected of
three weeks. As this was a criminal trial all of    being related to terrorism. The US authorities
my evidence had to stand up to the test of proof    have the right to freeze assets and place duties
                                                                                                           Jim Wardell, FCA, FHKSA, FHKIOD
‘beyond reasonable doubt’.                          on financial institutions and others to report
                                                                                                           Managing Director
                                                    suspected transactions. The US authorities are
                                                                                                           CCIF Corporate Advisory Services Limited
THE OUTCOME                                         further given powers to stop banks doing
The two persons who assisted Law Kin Man were       business with any institutions that are judged
found guilty of a total of six charges under Hong   ‘soft’ regarding money laundering or weak in
Kong’s Drug Trafficking (Recovery of Proceeds)      efforts to track terrorist funds.
Ordinance 1989. Both were subsequently
sentenced to 12 years in prison. In addition to     Germany is planning a central register of bank
the convictions, the Hong Kong government was       accounts, perhaps to allow more general
able to seize more than HK$130 million              exchange of information or to make it easier to
(US$17 million) as a result of our investigation.   search for particular individuals. At the moment
                                                    France is routinely collecting information
The close of the trial in Hong Kong brought to      centrally on account holders.
an end of more than six years’ work. Just how
crucial this work had been to the outcome was       Sometimes, offshore entities are set up to limit
perhaps best emphasised by the Honourable           the tax exposure of non-native corporations and
Mr Justice Bewley in his summing up of the case:    individuals. These entities, however, can quickly
“If you take the view that you cannot be sure       be exploited by criminal underworld, largely as
that Mr Wardell’s theory and opinion is correct,    a means of laundering illegally acquired funds.
that is the end of the case.”                       Today, there is growing concern that
                                                    international terrorist organisations could do the
SUSPICIOUS TRANSFERS                                same, using financial centres to transfer funds
The bank’s accommodating behaviour and the          to their agents abroad.
fact that money laundering was not an offence
in Hong Kong in the 1980s made the task of          PROFESSIONALISM
tracing the money much more difficult. Now-         The above case is just one example of the
adays, banks are required in terms of their         numerous types of fraud and money laundering



22     perspective Summer 2002

								
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