AUDIT TO DETECT FRAUD AND CORRUPTION: EVALUATION OF THE FIGHT AGAINST CORRUPTION AND MONEY LAUNDERING Part III The part of Anti-Money laundering

2 Framework of the report National Audit Office of the People’s Republic of China Introduction To be considered further( based on feedback of SAI Iran, Iraq, Bangladesh, Indonesia, etc.) 6 parts (Background, research objectives, research approach, summary, definitions) Additional information need Audit limitations The use of external resources, (ISSAIs and other Audit Guidelines, experience of WB, UNCAC, etc.) Audit toolkit, SAIs database Final Conclusion Others (e.g. Research timetable, etc.)

3 National Audit Office of the People’s Republic of China Note: accuracy of the result to be further confirmed by SAIs additional information needed by SAIs that have direct audit role in detecting laundering activities Other SAI, which state that the detective role is incidental, any audit experience SAIs would like to share

4 II Evaluation of Current Situation of Money Laundering National Audit Office of the People’s Republic of China —— Current situation of Money laundering Basic concept and characteristic of money laundering intrinsically linked to Corruption offenses three stages transactions Severity and Trend of money laundering Pattern of Money Laundering High occurrence area Most common method Environment favorable for money laundering Offences Associated With Money laundering Root Cause & Consequences of Money Laundering

5 II Evaluation of Current Situation of Money Laundering National Audit Office of the People’s Republic of China —— conclusion As a frequent way of concealing illegal activities, money laundering is perceived to be serious, tend to increase in recent years and getting more sophisticated over the years. The main pattern of money laundering is observed both in the public and private sector. Business transactions, finance and banking industry, real estate, trade and construction have the highest risks of money laundering Money launderer tend to use diverse and complicated method to disguise the nature of the money, business transactions, cash transactions, and through financial institutions are most common ways of achieving this goal, in some countries, there are small or informal financial service providers acted as an professional channel to facilitate the laundering activities Offences closely associated with money laundering are notably identified in corruption, others may include drug dealings, embezzlement, production, buying and selling of illegal goods and terrorism, etc. Criminals, by conducting laundering activities, mainly seek to legitimate illegal gotten money, hide illegal accumulated wealth, avoid prosecution and evade taxes The Use of cash and money transfer has considered to be the most favorable environmental factors that breeds the money laundering activities, In addition, inadequate supervision/control system of bank and other financial institutions is also identified as important factor In general, most of the responsible authorities considered money laundering is causing serious consequences to the country’s security, international reputation and weakens the economy system including economic reform, government control over economy and financial institutions.

6 III Evaluation of current situation anti-money laundering National Audit Office of the People’s Republic of China —— Evaluation of anti money laundering Legal Framework AML Board /Authority Boards /Authorities and Basic function Independency The Role Of Financial Institutions AML &KYC Procedures Suspicious Transactions Environment favorable for money laundering International Cooperation Education, Awareness and Other matters The bottleneck constraints and obstacles in promoting money-laundering actions Inhibiting Factors Educational / training programs

7 III Evaluation of current situation anti-money laundering National Audit Office of the People’s Republic of China —— conclusion It seems that for better performance, countries should pay more attention to independence of their anti-money laundering board / authority in aspects of “financial” and “recruitment of employees” The subject of punishment of money laundering incidents is not in ideal situation and needs more consideration Also, there exist problems and obstacles which inhibiting the result of fighting against money laundering. The problems like lack of competent and experienced staff to handle money laundering cases and also limitation of citizen’s knowledge about money laundering criminal are serious problems and should be given more attention In most countries, namely Australia, China, Indonesia, India, Iran, Malaysia, Pakistan, Philippines, South Korea, and Turkey believe that anti-money laundering efforts have had positive impact and contributed to prevent money laundering in their countries. While Myanmar, Iraq and Thailand, stated that these efforts have not had evident impact nowadays but will have in the future. Russia stated that result of the current fight against-money laundering is not effective.

8 IV Evaluation of SAIs’ roles in detecting and preventing money laundering National Audit Office of the People’s Republic of China legal mandate of SAIs. The mandate and authorities is limited in some countries, for example, only 3 SAIs have the legal authorities to detect money laundering activities, in addition, Iran & Iraq has Special unit or team of conduct audit on money laundering.Other SAIs have no legal authorities or provisions about their roles or responsibilities on the issue of money laundering, 2 of them (Korea, India) could play a role to detect money laundering but merely incidental to the audit services being rendered and not really an audit focus. Roles & Approaches. SAIs of China and Iran adopt a proactive approach through a risk based audit aimed at detecting red flags or symptoms of money laundering; SAI of Iraq is more focused as it has both proactive and reactive approaches against money laundering; Respondents Have legal mandate according to constitution, laws, rules and regulations Have anti-money laundering strategy SAI audit focus on anti-money laundering YesNoneYesNoneexpressincidentalnot concern AUSTRALIA xX X CHINA xx x INDIA xXx INDONESIA xXx IRANx x x IRAQx x x KOREA xXx MALAYSIA xX X PHILIPPINES xX X RUSSIA xX X THAILAND x X X

9 IV Evaluation of SAIs’ roles in detecting and preventing money laundering National Audit Office of the People’s Republic of China Audit manual or guideline SAIs China and Iran have specific manual or guideline on anti-money laundering that helps auditors prevent and/or detect and investigate money laundering incidents. SAI China incorporates anti-money laundering audit in regular guidelines and manuals such as in Commercial Bank Audit Manual. Personnel & Training SAIs China, India, Indonesia, Iran, Iraq, Korea, Malaysia and Russia expressed that they have very few personnel who have adequate training in the detection and investigation of money laundering. SAIs Iran, Iraq, Malaysia and Thailand provide trainings to their personnel about anti- money laundering. Audit report and actions Assessment of SAIs’ performance and integrity in the detection and investigation of money laundering Majority of the SAIs expressed that they contribute best in preventive actions by providing recommendations to improve entity’s anti-money laundering and internal control system and sharing best practices and benchmarking information to assist decision-makers. This is especially the case for SAIs lack necessary mandate and authorities to directly detect money laundering activities

10 IV Evaluation of SAIs’ roles in detecting and preventing money laundering National Audit Office of the People’s Republic of China Audit limitations in the prevention and detection of money laundering Suggested actions & needs. Seven SAIs believe that there is a need for professional training to improve the skills of the auditors; six SAIs expressed that there is a need for a change in the laws, rules and regulations to give the SAI sufficient mandate against money laundering (namely China, Malaysia, Indonesia, Korea, Iran and Iraq); and five SAIs feel the need of a reorganization to devote necessary resources, auditors and budget, to the fight against money laundering. Cooperation among SAIs and anti-money laundering agencies

11 IV Evaluation of SAIs’ roles in detecting and preventing money laundering National Audit Office of the People’s Republic of China —— conclusion The mandate and authorities is limited in some countries, for example, only 3 SAIs have the legal authorities to detect money laundering activities, in addition, Iran & Iraq has Special unit or team of conduct audit on money laundering.Other SAIs have no legal authorities or provisions about their roles or responsibilities on the issue of money laundering, 2 of them (Korea, India) could play a role to detect money laundering but merely incidental to the audit services being rendered and not really an audit focus The tactics and role of competent SAIs in combating money laundering is largely focused on detecting the suspicious activities For SAIs do not have the legal mandate, their actions are mainly confined in providing recommendations to improve entity’s anti-money laundering and internal control system or sharing practices and benchmarking information to assist decision-makers (preventive actions) In cooperation with AML agencies, SAIs of China, Iran and Iraq have close cooperation and attachment of officers with other enforcement agencies to acquire investigative skill, knowledge and experience in the fight against money laundering.2 other agencies has experience in undertaking joint efforts or information sharing with AML agencies (Philippines, Malaysia) Education, training, and expertise of AML is deemed important but inadequate. The majority of SAIs identified that there are few personnel who have adequate training and knowledge in the detection and investigation of money laundering.

12 V Introduction of typical audit practices National Audit Office of the People’s Republic of China —— Best practices and typical audit cases in preventive role of anti-money laundering Objectives in preventive role of AML Strengthen Public institutions’ internal control systems. Building Network between SAI and anti-money laundering agency Avoid transferring illegal funds Summary of SAIs’ experience and typical examples Main approach & methodology Conducting audit on evaluating financial institutions’ implementation of necessary AML procedures& systems as stated by law. (China) Announcing cases of money laundering crimes discovered or transferred to responsible agencies (i.e. AML bureau of central bank, judicial organs, etc. ) through official website or publications (China) Auditing internal control systems of public entities.(KOREA) Establishing a close relationship with the Supreme Council of Anti-money laundering (Iran), Improving knowledge about anti-Money laundering and promoting good governance (Iran) Achievements &Lesson learned

13 V Introduction of typical audit practices National Audit Office of the People’s Republic of China —— Best practices and typical audit cases in detective role of anti-money laundering Objectives in detective role of AML Detecting doubtful activities. Monitoring AML measures of executive agencies. Increased reliability in the banking system, Summary of SAIs’ experience and typical examples Main approach & methodology Risk based approach aiming at detecting red flags of money laundering. Taking into consideration of various internal & external information Addressing the weaknesses in the internal control systems Regulation and instruction set by SAI and AML agencies Establishing facilities and mechanism to promote and intensify detection of money laundering including: initiate legal actions Achievements &Lesson learned

14 V Introduction of typical audit practices National Audit Office of the People’s Republic of China Best practices and typical audit cases in reporting and follow-up role of anti-money laundering Objectives in follow up role of AML To urge/suggest the relevant organs to conduct further investigation on suspected cases and to confirm whether they constitute crime of ML Reporting cases of money launderingand suspicious cases to the Supreme Council of Anti-money laundering as the highest governance body to combat money laundering. Increasing social awareness by protecting public funds and mitigate the bad effect of money laundering citizens on various aspects of life. Following up of detected money laundering cases have its impotency to recover such money and prevent engaging these funds in the terrorist activities. Summary of SAIs’ experience and typical examples Main approach & methodology Timely reporting cases of money laundering and suspicious cases to the Anti-money laundering agencies Following up the actions of Money laundering reporting office and providing specialized staff, if necessary, technical support Using experiences of other SAIs Achievements &Lesson learned

15 VI Measures on improving audit's function in detecting and preventing money laundering National Audit Office of the People’s Republic of China —— SAI and improving anti-money laundering measures at international level SAI Iran strongly supports and encourages the government to fight against money laundering through implementing its commitments internationally. INTOSAI Working Group on Fight against Corruption and Money Laundering. SAI Iran has been a member of the (WGFACML) since 2012 when for the first time attend the 6th meeting of WGFACML in Poland. The World Bank and International Monetary Fund: Iran as a member of the World Bank and IMF cooperates with both institutions in fighting against corruption and money laundering. SAI China believes that there are several aspects that may have room to improve enhancing SAI’s cooperation with international agencies in jointly supervising Global financial institutions, to tracking suspicious activities as a whole, to eliminate blind legal area and to prevent risk transferring and deteriorating. exploring to establish intelligence, data and information sharing system. Due to legal barriers, it is hard to obtain information of doubtful institutions/individuals’ overseas activities, therefore, an information sharing system could largely save energy of SAI in the process of negotiating, judicial assistance, etc. SAI Iraq believes affiliated organizations could play positive role in fight against corruption and money laundering, such as “world bank, International Monetary Fund, International Chamber of Commerce

16 VI Measures on improving audit's function in detecting and preventing money laundering National Audit Office of the People’s Republic of China —— SAI and improving anti-money laundering measures at national level Strengthened the cooperation with other competent authorities and financial institutions such as the case of SAI China: 1) Actively participate in joint conference system : CNAO is not yet member of anti-money laundering joint conference, which is a main channel for related organization to get informed of the latest progress of AML, therefore, by joining this conference as a formal member, SAI could perform its duty under a better framework. 2) Promote the process of establishing “Audit platform & data system of Commercial bank“, since 2008, the financial institution audit department initialed this project, Till now, this system has been establish in over 8 state-owned commercial banks. Through authorization, auditor could gain remote access to banks’ database to obtain necessary information in analyzing suspicious activities (e.g. doubtful transactions, bank loans information, etc.) SAI would improve the ability and efficacy of detecting money laundering activities If this system could be extend to more financial institutions. Timely Transfer & proper follow up work. FBSA will follow up the actions of Money laundering reporting office and provide specialized staff, if necessary, technical support to affiliated bodies as well as monitor and audit the activities of private banks with central bank of Iraq.

17 VI Measures on improving audit's function in detecting and preventing money laundering National Audit Office of the People’s Republic of China —— SAI and improving anti-money laundering measures at organizational level The investigative audit Create Anti-money laundering strategy The assessment of financial institutions’ AML strategy and management The risk based method in detecting suspicious activities Whistleblower, Training and Education For SAIs do not have direct function on AML, possible measures: The extension or change of laws & regulations to give SAI adequate powers to perform this function To ensure anti-money strategies and control measures within AML agencies & financial institutions are properly developed To ensure screening standard and reporting system relating to AML is effectively established and implemented.

18 ——CNAO’s role and methodologies in detecting money laundering activities National Audit Office of the People’s Republic of China —— China AML agency and Its responsibility —— Why do we need SAI to detect money laundering People’s bank of undertakes the AML supervision and management responsibilities according to law. 1) conducting studies on and establishing anti-money laundering rules and policies for financial institutions; 2) engaging in international cooperation on anti-money laundering; 3) consolidating and analyzing information on suspicious payment transactions; 4) assisting the judiciary departments in the investigation; 5) ensuring proper security arrangement for the PBC system Role of CNAO (including fighting against financial crimes) Full picture from audit perspective Screening from large volume of reported transactions Use of external information (registration information, tax payment history, etc).

19 ——CNAO’s role and methodologies in detecting money laundering activities National Audit Office of the People’s Republic of China —— Method In general, CNAO has three approaches, first is to analyzing the data or information provided by financial institutions’ AML system(e.g. large & doubtful transactions, etc.). Second is to conducting investigation on information provided by whistle-blower. The third way, which is used frequently, is to conduct direct computer-based (Both quantitative& qualitative) analysis of business and financial data to locate doubtful activities. By adopting quantitative methods, CNAO identify & sorting abnormal clients’ activities & transactions from financial institutions’ IT systems in which detailed information of payments &settlements, credit/loans information, etc., are recorded and preserved. The common used analysis tool is database programming (increased the efficiency of locating abnormal values). By adopting qualitative methods, CNAO evaluate the authenticity and consistency of client’s activities with its financial status, and other external & internal information.

20 ——CNAO’s role and methodologies in detecting money laundering activities National Audit Office of the People’s Republic of China —— Audit process Preliminary auditing process: applying quantitative/qualitative analysis to locate suspected transactions/institutions (as stated above). Determine the types of activities which require special attention and in-depth investigation. Collecting sufficient evidence and evaluating the possibility of doubtful activities involving crime of money laundering. As the evidence accumulates and reaches threshold value of Auditors ’standards of confirming a money laundering activity, CNAO will delivered an audit information letter and transferred to responsible institutions of AML or judicial organs. (please refer to the report and following up role)

21 ——CNAO’s role and methodologies in detecting money laundering activities National Audit Office of the People’s Republic of China —— key areas Doubtful business background when clients engage in: Establish business relationship with financial institutions, such as opening bank accounts, applying for loans, etc. large payment or income in the name of purchasing/selling goods or services (including financial products) Related Transactions between institutional clients with its affiliated companies Doubtful institutions’ activities Shell company with no specific or actual business. Newly registered company with large transaction/income A number of companies with same corporate representative or similar shareholders. Other Doubtful transactions large cash withdraw/deposit large cross--border exchange settlement, Frequent transactions in short time etc. Large Transaction between institutions and individuals. Other inconsistent or irregular transactions Also, during this process, CNAO pay attention to Politically exposed persons

22 ——CNAO’s role and methodologies in detecting money laundering activities National Audit Office of the People’s Republic of China —— A corruption related money laundering activities detected by CNAO Audit project: financial audit of policy bank of China Policy loans to enterprises Potential risk of “Power rent seeking” Corruption fact Receive money through third party The role of “Consulting/Advisory firms” How did auditors detect? Follow the “money flow” to borrowers, and to review the intended use of the loan unusual payment made to the consulting firm in comparison the services provided Transactions from institution to individuals Further investigation Procedure of credit approval and participating person Background check of the consulting firms and its related parties

23 National Audit Office of the People’s Republic of China