The Role Of Forensic Accountants In Detecting Money Laundering In The Malaysian Banking Industry

Definition of Money Laundering

The operation of the banking industry needs to be done with the help of the regulation related to anti-money laundering where the banks are functional within the countries. This is due to the challenges that are being faced by them from the customers, FATF, governments and supervisors for identification of the risks and managing it in a proper manner. This has to be done so that the penalties for financial reputation were reaching new heights. Therefore, almost all the banks have improved their infrastructures so that the accounting systems can be controlled through an internal environment. This led to providing more importance on the accountants who specializes in forensic accounting also known as ‘forensic accountants’. According to the United Nations Office for Drug Control and Crime Prevention (2001), the laundered of anti-money acts as the protector of capitalism in the capitalist countries that have developed on a major scale.

Money laundering refers to the process of creating a circumstance where a huge sum of money is being taken for criminal proceedings such as terrorist activities or trafficking of drugs, which are shown as legitimate sources of spending. This type of illicit activity is considered to be a nuisance where the personnel tries to make the amount look clean.  

The rise in the money laundering activities can be estimated to be £231 billion per year within the private as well as the public sector, which needs to be stopped with efficient investigation in to the traditional methods of the auditing system, which is ineffective for the detection of the fraudulent activities within the banks (Whitehead, H. 2016). The world was taken aback with the various catastrophes that happened within the banks with respect to the activities of money laundering. An example of this would be the financial debacles of Standard Chartered Bank and HSBC who are guilty with the control of money laundering activities in a loose manner and the transactions of £5.57 billion and £191.8 billion have been found to be suspicious respectively (McLaughlin & Pavelka, 2013). The BSI Bank in the year 2016 was asked to shut down its operations by the Monetary Authority of Singapore, as it breached most of the requirements that were present in anti-money laundering activities along with the poor management of the operations within the banks. It was also seen that the bank had behaved with the staffs in a bad manner as well (MAS, 2016). The French Prudential Supervision and Resolution Authority (ACPR) had fined BNP Paribas an amount of £8.75 million due to the inadequate control measures with respect to the anti-money laundering activities. In the year 2014, BNP Paribas was fined an amount of $9 billion by the authorities of the United States, as it violated the sanctions that were made against Iran, Sudan and Cuba (Reuters, 2017). The big losses that are happening in the banks are affecting the financial system of the institutions as well, which gives rise to a bigger question that what is wrong with the systems for prevention and detection within the banks? It is necessary for the banking institutions to have a forensic accountant, analysts for anti-money laundering activities and auditors so that they can help in the identification of the risks that are present with the laundering activities and the threats of financing the terrorist groups (Jadavji, 2011; Josiah & Samson, 2012). They are also related in a different manner as well where these personnel are on a constant lookout for the misrepresentation of the financial data along with the fraud transactions that may take place within the banks so that it can be detected and proper measures can be taken up (Ozkul & Pamukcu, 2012).

History and Concept of Money Laundering

The studies that have been conducted earlier showed that some of the people within the institutions are not competent enough in meeting the demands for assessing the risks within the financial system with the help of the latest technologies or the controlling system in an internal manner (Simwayi & Wang, 2011). A survey that was conducted by PwC known as the Global Economic Crime Survey 2016 showed that 19 percent of the claims showed that hiring trained and experienced employees within the institution is one of the biggest challenges for detecting the financial corruption within the organization. Almost all the banking institutions are finding it difficult to hire personnel that are highly skilled so that they can identify the areas that are vulnerable within the organization and provide assistance on the fraud that is taking place within the organization (Zea, 2003). This will help in leading to a better rate of growth, as the professionals will be able to detect and prevent the fraudulent activities that has helped in giving rise to forensic accounting (Ozkul & Pamukcu, 2013). According to Hopwood et al. (2013), forensic accounting is seen as the exploration of the skills that are related to the analysis and investigation of the issues that are used for handling the issues of economy so that it can help in satisfying the demands that are required by the law. Curtis (2008) was of the opinion that the legal boards have found the forensic accountants suitable in providing better and efficient services for analyzing the documents related to finance in the cases of frauds. Curtis (2008) was again backed by Hopwood et al. (2013) by stating that the accountants who are trained in a better way will have a minimum amount of knowledge with respect to the policies of accounting, legal systems, Information Technology (IT), auditing along with the accounting that will help in investigating the potential benefits that are linked to the banking institutions (Ebere & Ibanichuka, 2016).

There have been further studies as well on the demands that are increasing on a further manner with respect to forensic accountant. In a study conducted in 2017 by Kesslr International, it was seen that there has been an increase in the demand of forensic accounting over the last 40 years along with the advancements in technology that has led to the growth in the fraudulent activities within the banking institutions. The alterations of the existing laws with respect to the statutes in anti-money laundering have helped in the creation of demand for investigating in to the fraud activities through forensic accounting (Henning & Misuraca, 2013). The rise in the confidence of the business along with the disputes that needs to be feared and the level of awareness that may increase the risk of the reputation has given a rise in the demand for the forensic accounting (Stuart, 2018). The graph that has been provided below shows the industry that is related to forensic accounting with a strong rate of growth of around 8.7 percent on an approximate and by the end of the five years, the rate of growth has been forecasted to be 6.7 percent by 2018. This is due to the growth on a sustainable manner in the finance as well in the insurance industry (IBIS world, 2013). The revenue that is accounted from the services of forensic accounting is about 5 percent in the accounting industry on an overall basis, which shows that is has an advantage over the services that are being provided by the accounting industry as well (Henning & Misuraca, 2013). The evidence that is available shows that there is an increase in the growth of forensic accounting, which is strong as it helped in contributing towards the growth of revenue at times of financial crisis as well.

The Relevance of Forensic Accountant Skills to Detected Money Laundering in Malaysian Banking Industry

Not only anti-money laundering analysts but also the analysts for forensic accounting were rising in numbers over the years after the scandals that happened in the corporate sectors and had grown over the years, which had to be dealt in an effective manner with the help of examiners who specialized in handling these frauds (Narayanrao, 2016). This has led the analysts to be termed as ‘watchdogs’ for the markets that expertise in financial activities along with a dedicated team known as Anti-Money Laundering (AML) (Perezts, Fay and Picard, 2014). The major role of these analysts is that it helps in identifying the primary areas that are likely to be affected with the fraud in money-laundering activities such as frauds in cheque, fund embezzlements, misuse of the funds that are present within the corporate sector and others. The AML analysts need to understand the training procedure with respect to the management of risks and regulations so that the supervision of the activities and the products can be done in an efficient manner. Half (2017) highlighted the fact Benchmarking within the Accounting and Finance Function Report helps in identifying the demand of the AML analyst, which has risen from 56 percent and is expected to see an increase within the next 3 years as well. Salary Guide according to Robert Half in the profession of accounting and finance had said that the basic salary of the personnel needs to be in compliance with the financial services that are being provided by them, which is also inclusive of the officers and the compliance managers along with the chief officers of the anti-money laundering activities that is forecasted to rise by at least 3.4 percent by the end of 2017. It can thus be inferred that the demand of the analysts who specializes in AML has been increasing and most of the organizations are ready to remunerate them with a better package for the services rendered by them. The primary role of the AML analyst and the forensic accountant is that after the fraud has been committed by using deceptive means of financial transactions, it needs to be analyzed, examined and presented through a proper structure of sup-ort, which will help the officials to understand the problems (Narayanrao, 2016).

Nevertheless the question asked by the researchers is with respect to the importance of the technical abilities and the specialized skills that will help the forensic accountants in identifying the frauds that has taken place within the organization (Lukito, 2016; Harris & Brown, 2000 and Ramaswamy, 2005). This is due to the fact that the investigative, communication, organizational and the analytical skills in assessing the frauds is one of the important skill sets that needs to be present within the AML analyst (Narayanrao, 2016). With respect to that, DiGabrielle (2007, 2009) stated that the studies has helped in determining the relevant skills that needs to be present within the forensic accountant along with the 9 competencies, which needs to be viewed from various perspectives such as practitioners of forensic accounting, academics of accounting and the people who uses the services present in forensic accounting.

Major Scandals in Corporate Houses Related to Money Laundering

Another point also needs to be considered that the extent of possibility that is present in hiring, developing and training the people for the correct roles within the organization along with the right set of skills. To be more specific, the question is that what are the major sets of skills that the banks are looking within the employees when they are going for a AML analyst? Does the foundation of AML in the firm along with the compliance in financial crime will help in monitoring and detecting the activities of money laundering in an effective manner? Should the banks employ the people who have knowledge of the skills required in forensic accounting? ACAMS (2017) had responded that an interview conducted with the practitioners of AML helps in suggesting that skills related to forensic accounting has to be present among the forensic accountants so that it will help in assisting the investigations, which will lead to the recovery of the funds that has been embezzled through the crime. The techniques present in forensic accounting helps the AML analysts in researching the activities that may be suspicious so that the information can be useful while filing the SAR. The information that is present within the SAR helps in assisting the enforcement of law so that proper leads can be developed for investigating the criminal activities. Moreover, the in-depth investigation of the AML in utilizing the techniques of forensic accounting can be done by enriching the reporting process of SAR and in compliance with the requirements of the report within the organization (ACAMS, 2017). Silverstone et al. (2012) studied that the forensic accounting does not act as a substitute for the comprehensive investigation methods that are done in an extensive manner that helps in tracking the transactions in all the banking institutes.

The scandals that are present in the corporate sector such as the crimes related to white collar and the activities of money laundering where the analyst of anti-money laundering and forensic accountants are in the limelight for solving the issues. The act of money laundering has taken up a major portion of the scandals in corporate sector on a global manner and is estimated to be around 5 percent of the Gross Domestic Product (GDP) of the world estimating a value of 1-2 trillion as loss in money laundering on an annual basis (IMF, Website). According to Masciandro and Barone (2008), the estimation of the value for money laundering activities is around USD 1.2 trillion that is equal to 2.7 percent of the total GDP of the world. A report by the United Nations Office on Drugs and Crime (UNODC) estimated that in the year 2009 that the money laundering cases was around 3.6 percent of the GDP in the world. It was inferred that there is a strong indication that most of the countries will be following a standard regulation. Within Malaysia, the statistics showed that there were around 188 charges against money laundering activities and the value was around RM 29.9 million in the year 2005 (INCSR Report, 2006) and that there were around 94 cases that were being held in the court amounting to a total of RM 1.2 billion till the year 2010 (Malaysian Insider, 2010). BNM reported that there are alerts of fraud that is going on within the banks, which are being investigated under Anti-Terrorism Financing, Anti-Money Laundering and Proceeds of Unlawful Activities Act (AMLATPUA) 2001.

The evidences may be present in the report from UNODC where the flow of illicit financial activities on a global manner has to be less than 1 percent from being seized by the authorities (PwC, 2016). KPMG in 2013 had reported that some of the defrauding companies did not even report about the fraud that has happened within the institution. A survey that was conducted showed that around 47 percent of the respondents had agree to the fact that the companies did not report the frauds due to the negative effect that it would have on the brand image within the public, around 32 percent agreed that the confidence was not strong in facing the judiciary and the enforcement system and around 24 percent reported that the criminal cases were mostly unsettled. Business Insider (2011) had stated that the figures presented by the organization is for the media only and The Financial Action Task Force (FATF, 2004) stated that the estimation of the money laundering will lead to a body of inter-governments so that the fight against the money laundering activities can be done strongly. The theory of FATF was defended by Shanmugam et al. (2013) where it was stated that the availability of the data is easy along with the values that are related to the activities of money laundering. In a same manner, Reuter and Truman (2005) had stated that the scale estimation for the act of money laundering is difficult to measure as it does not exist at all. Alkaabi et al. (2010) stated that there is no direct measure for estimating the way money moves out from the financial system and is converted in to illegal funds that cannot be traced due to the lack of the financial tools for estimating the amount of funds that has been embezzled.

In the past few years, it was seen in the United States that almost a dozen of financial institutes have been imposed with fines of huge amounts relating to millions and billions in money laundering (PwC, 2016). The Global Economic Crime Survey 2016 (GECS 2016) had reported findings that almost 18 percent of the financial institutions have faced actions from the regulator due to fraudulent activities. An example of this would be the collapse of Bank of Credit and Commerce International (BCCI), as it was involved in crimes with respect to financial system and money laundering activities. The scandals of Bank of New York in the year 1999, the scandal of Riggs Bank in 2002 and the fraudulent activities of Standard Chartered and HSBC Bank in the year 2012 were due to the lack in the controls of anti-money laundering. The Commonwealth Bank of Australia in 2017 had also faced multiple problems with respect to the laws of counter terrorism activities and money laundering and in the year 2018, Citibank has shortcomings in its policies of money laundering, which had exposed the dangers that are present within the banking system (Whitehead, 2016; Smyth, 2017; Rahman, 2013, Reuters, 2018).

The scandals within the corporate sector of Malaysia are also responsible for the calamities that are taking place on a global basis. The 1MDB that is 1 Malaysia Development Berhad, Megan Media Holdings Berhad and Transmile Group Berhad are some of the famous cases that are facing charges for the corporate crimes (Omar, Said and Johari, 2016).

One of the biggest scandals with respect to finance was the 1MDB where the department of justice (DoJ) located in the United States reported that around $3.5 billion was found to be stolen from 1MDB. Case (2017) reported that the main motive was the promotion of development of the economy but instead the money was found to be present within the associates of Prime Minister Najib. The money was divided in to $1 billion that was present in 1MDB and Petro Saudi, the other part of the amount, which was $1.4 billion, was issued as bonds to an offshore company in Switzerland and the remaining $1.3 billion was transferred to an account in Singapore. Laorgna (2015) stated that most of the officials present in 1MDB were corrupt and the funds of the public were treated as their own bank accounts. The conspirators in the money laundering case stated that they were under the theory of fraud triangle which is the pressure, opportunity and rationalization. The case of 1MDB was that the parties had the materials, which helped them in accessing the accounts of the people. These accounts were opened and the money was transferred to the offshore company so that they can gain legitimacy.

Transmile Group Berhad (2007) in Malaysia was also a public listed company that had committed a financial fraud (Securities Commission, 2013). The company was managed by Robert Kuok who is a billionaire in Malaysia. The company was incorporated in 1996 on 13th January and was listed under Bursa Malaysia in 1997 on 27th June and was removed from the list on 24th May, 2011 due to overstating of the profit margin by approximately RM622 million in 2004 and 2006 respectively (Li, 2007; Omar, 2012; Fong, 2007).

Megan Media Holdings Berhad (2007) was recognized in the early part of 1994 and in the year 2000 it got listed in the second board of Bursa Malaysia. The company was listed in to the main board by 2002 and subsequently was removed from the list by 2008 because of its subsidiaries Memory Tech and MJC Pte Ltd that defaulted on paying RM47 million to its bondholders. Memory Tech was also found to provide a deposit of 13 lines of products that were of fictitious nature and had an amount receivable of RM334.30 million. The assets that were present in Memory Tech was estimated to be around RM456 million. The payments that were meant to be for the creditors were paid to the third parties of the company, which led to a loss of RM1.27 billion for the company (News Straits Times, 2007; Omar, 2012).

The major scandals in the corporate houses have the following provisions in money laundering activities that they are subjected to:

1.The federal government of Malaysia had captured RM32 million worth in cash, cheques amounted to RM 550,000 and around four land plots were also found with respect to scandal of Port Klang Free Zone (PKFZ) and was found guilty under the Anti-Money Laundering and Anti-Terrorism Financing Act as well (The Star, 2011).

2.The previous chief of the state steel company in malaysia known as Perwaja Steel was dragged in to court, as they were found to embezzle RM76.4 million that was paid to a company known as Frilsham Enterprise based in Hong Kong in 1994, which was found to be not present at a later date (The Star, 2004; BBC News, 2004).

3.AMMB Holding Bhd (AM Bank Group) was charged with RM53.7 million by the Negara Malaysia Bank due to the breach in its non-complaints and the real offense has been kept as a secret. The sources that were present has stated that there has been links in transactions with SRC International Sdn Bhd and 1MDB (Raj, 2015).

4.The Malaysian Securities Commission had found two of the directors of Cold Storage (Malaysia) Bhd engaging in fraudulent activities regarding securities and the breach of trust with criminal activities amounted to RM185 million of the funds that are present within the company (Securities Commission Malaysia, 2005).

5.The opinions present by Zahra, Priem and Rasheed (2007) showed that the financial scandals resulted in loss of billion of money and its value of stock as well and it led to the damages of the employees as they lost their income, economy of the community also decreased and the moral of the society also looked depressed.

Ranging from Citibank, Transmile, BCCI, 1MDB to HSBC, most of the news of the previous decade were being dominated through the platform of modus operandi that are used within the banking institution. The news that was presented by Eddie Chua stated that around RM25 million was involved in the business of dirty money that were taking place on a weekly manner due to loopholes that were present within the financial system (Malay Mail, 2002). Malaysia Insider (2013) stated that the loss happened due to the illegal activities in monetary terms that had taken place between the period of 2009-2013 and amounted to RM17 million and RM198.2 million. The Deputy Finance Minister Datuk Dr Ng Yen Yen in an interview with the Business Times stated that a survey that was conducted showed that the banks lost almost ten times of the amount due to the activities that involved frauds when compared to the robberies. Based on the case that was available, it seemed that the banks are focused mainly on the contact point of the money launderers on the first-level. The banks are now the primary focus of the efforts in anti-money laundering facilities such as the loans, deposits and the foreign exchange (Idowu & Obasan, 2012). Rahman (2013) also stated that the system of banks have long ago established the element that is present in money laundering is due to the confidentiality and the complexity of the banking system. The findings from GECS 2016 showed that the anti-money laundering and handling the financing of terrorism activities have created greater challenges and a complex financial system due to the actions and sanctions in the regulatory body. This has increased the risk of the enforcements of AML and ACAM (2017) stated that the analyst who have proper knowledge of forensic accounting can find solution by applying investigative skills for the detection of money laundering within the banking industry.

Forensic accounting is the first stage in Malaysia that helps in comparing them with the developed countries and according to Ibrahim and Abdullah (2010), the misconceptions of this accounting type si that the disciplines that are present bin accounting is considered to be similar. Lee, Ali and Gloeck, 2008 stated that the studies showed that the abnormality in the financial report can be detected through the primary auditing intention where the irregularities can be detected. This is due to the fact that the perception of Malaysia is that the cases are all related on a smaller scale, which has increased since 2000 (The Star, 2015).

The minimum utilization of the skills in forensic accounting is one of the factors that has led to the increase in frauds and scandals. PwC (2006) in a survey found out that 20 percent of the companies are eager to invest in the services of forensic accounting. The AML analysts prepare and benefit by detecting the fraudulent activities, which may result in growing of the corporate scandals (Ernst & Young 2010; Peterson and Zikmund 2004; Bierstaker, Brody and Pacini 2006).

The complexity and scope of the skills will deepen, which will help in increasing the programs related to anti-money laundering activities. The compliance with AML has increased by approximately $8 billion by 2017 at a compounded rate of interest of 9 percent. A survey done by Duff and Phelps in 2017 showed that 10 percent of the total revenue of the firms is in compliance by 2020. Most of the big banks in the world are under pressure for controlling the cost of regulations and prevents the money-laundering through stress tests. The survey conducted by Thomson Reuters Global Cost of Compliance in 2016 showed that almost 69 percent of the firms have to increase the cost of the staffs that are skilled.

JP Morgan has added around 4000 AML analysts and HSBC is considering including 3000 AML analyst so that they can work in compliance with others (Noonan, 2015). The cost of the actions of enforcements along with the penalties on a larger scale will result in the failure of compliance and institutes like Citigroup, Deutsche Bank, UBS and Credit Suisse do not disclose the details of spending on the regulatory bodies (Noonan, 2015).

The entire research is divided in to five chapters where the first chapter consists of the introduction regarding the background and the problem statement based on which the research is being done. It will also include the questions and objectives on which the research will be based.

The second chapter is the review of literature where the background of the banking industry in Malaysia will be provided along with the forensic accounting and its application n the banking industry. It will also constitute of the theoretical framework and the hypothesis taken for the research.

The third chapter will be the method that will be chosen for the research such as the design of the research, process of data collection and the sampling procedure. It will also include the instrument of the research as well along with the pilot study and variable measurement.

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