What to do when you uncover Money Laundering

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Gold is an easy asset to use to launder value. It’s high value, easy to transport and can be moulded into any shape you desire. For the super rich criminal, it is a go to element of value to store criminal assets.

None of that is shocking. What is shocking, is when a big four audit and accountancy firm gets involved in a very, very blatant money laundering scandal. Like EY did.

In this post we will examine what happened, explore the person involved and ask questions or pose suggestions to cause Compliance Operators to think about what they would do in the position of the central player, Amjad Rihan, a person who stood up against the odds to try and secure ethical business practice.

Amjad Rihan was respected. He was good at his job and had shown talent in a short tenure with EY. He was promoted to a partner position in the EY Dubai operation, paying $50,000 into the firm to secure it.

In 2013 he was required to conduct an ‘Assurance Audit’ of a jeweller and gold dealer called ‘Kaloti Jewellery International’. The purpose of such an audit is to provide an independent written view on the quality and propriety of the audit client’s business practices. An assurance audit is not a financial audit but shares some of the characteristics of one. The word “assurance” is used because the auditor’s written views are intended to assure a reader of the auditor’s assurance report that the audit client’s business practices, in the auditor’s independent view, are as stated in the report.

Clearly, any professional putting a signature on a report such as this is asserting credibility to the business under audit. They are effectively lending the auditor’s respectability to the business under audit – to assign weight to their honesty and ethical business practices through the respectability of the auditor.

Charged with that Amjad set about his task. He had a small team working with him and they quickly uncovered what was effectively gold smuggling out of Morocco. The method used was simple. Coat the gold in a thin veneer of silver to convince Customs at the border it was silver being transported and not gold. This was to avoid the regulations and bar on exporting gold from Morocco. All the paperwork exporting the metal was identified as Silver leaving Morocco but imported into UAE as Gold. In addition to this irregularity Kaloti had taken part in cash transactions in 2012 to the value of $5.2 billion.

With one cash transaction for an eye watering $750 million – in cash!

Gold is recognised as a ‘conflict mineral’ internationally, meaning scrutiny on its trade should be more thorough. This is because of the points made above, ease of transport of high value, maliable and convertable easily. It is known to be used for terrorist financing and in the exchange of criminal assets.

There was no doubt, questions as to the standard of business were raised due to these suspicions. In fact during the trial EY accepted the suspicions around laundering of money and gold were present. I would go further.

It’s not just suspicious to be trading in cash for gold. It isn’t just suspicious that gold, deliberately disguised as silver was exported from Morocco.

This is money laundering. Period.

Yet when Amjad tried to raise this within EY, no one wanted to know. Various attempts to get him to re-write his findings were made, in a fudge to curry the favour of Kaloti, and more importantly the circule of influence around the company that went to the top of Dubai society. The route to the top was through an organisation called the DMCC. The Dubai Metals and Commodities Centre – a ‘sort of’ regulator in the Kingdom. They were part of the government machinery and tried, consistently, to have the cash trading and gold smuggling issues removed from the EY report.

Clearly EY were in a difficult position – but not one that could not have been thought through in a pre-considered way. It is not unfeasible when operating in a country that has no reason to trade in gold other than for its attractive nature as to its ability to be laundered, and as a safe haven as a store of value in troubled economic times. It’s also required, in good practice, to properly complete EDD when you look at the bare facts in this case.

  • Gold – mineral of conflict
  • High value
  • Wealthy business
  • International Trade
  • Gold trading in a country that doesn’t produce it

Gold trading in a country that has no gold mines is a known and publicised red flag for money laundering and terrorist financing. Compliance staff at EY will have (or should have) known this before the company even set offices up in the Kingdom. And this for me is the morally bankrupt nature of what EY did. They sent an auditor in, even if they operated without suspicion at that stage, with a high potential he would uncover ‘discrepancies’ with no apparent plan as to how they would handle those discrepancies.

For me, this is the problem with firms seeking to ‘do business’ without a proper process to manage ethical, moral and legal issues. It is a step too far to put an honest man, who had paid several thousand into the business to attain partner status, under undue pressure to conflict his ethical and honest nature – just to secure business. The risk he faced was insurmountable. He could ‘fudge’ the report and produce a ‘bill of good health’ for Kaloti. Essentially being bribed to do so. At risk if he didn’t was his investment into the firm and his whole present and future career.

Mr Rihan choose the ethical and honest route.

Mr Rihan is now global news. His image is across the media and his story well documented. How this impacts his future remains to be seen, ‘not a company man’, ‘can’t be trusted’ and other potential slurs could (probably will) follow him as he tries to secure employment elsewhere. And those slurs have followed him already.

I am sure the sole searching within EY will go deep. But will it remedy the past ills of the company? I doubt it. Money is the ultimate motivator, and if as an intelligent business, they couldn’t foresee potential conflicts when the contract to audit Kaloti was signed then, to be frank, would you trust a single audit they conduct in the future?

Due diligence springs to mind.

This is the central issue for EY. The more negative press you get relating to the ethical issues at the heart of this saga, the less people are likely to trust your future ‘audits’.

Of course, I am sure the marketing department and PR people will be working overtime to remove this stain on EY’s history but the sad fact of corporate life nowadays is repeated scandal after repeated scandal. Corporate level entities just do not seem to grasp the damage to reputation when they fail to do due diligence before they enter a contract and plan for an exit if they uncover clear criminal behaviour.

It seems the plan is to send in a partner, who is financially bought in and has risk at his door, in an unwritten strategy to have him shoulder the burden for any negative outcome. Reporting lines to senior people is managed to reduce the written trail and remove them from the risk. The business is set up to distinctly try and reduce risk throughout the group as they have entities separated by registration in separate jurisdictions.

Yet the judge in the trial, his Hon Justice Kerr, faced with four elements of the EY corporate set up as defendants, saw through this and rightly held the case had English jurisdiction – a line of defence EY’s lawyers tried to pursue, claiming Mr Rihan wasn’t entitled to English jurisdiction.

In the end Mr Rihan was awarded $11 million. That is a lot of money. But rightly awarded to compensate Mr Rihan for standing up for ethical and honest business and for being constructively dismissed from EY. His future now secure again (pending an appeal, which is likely).

What lessons can be learned?

For those in corporate business several lessons can be taken from this.

  • Ensure you do due diligence when clear risks are present in a contract and have a plan to manage them. With an exit strategy.
  • Provide support to your employees who will be under intolerable pressure and it is you that has created it.
  • Start from worst case scenario. While you save one business contract you put thousands of others at risk if you fudge ethics and integrity.
  • Protect your reputation not the contract.
  • Protect your people not the contract.
  • Consider the future not the present.

For those in roles that are compliance related:

  • Document everything, timed and dated.
  • Save all records off the organisation’s system.
  • Have someone have your back – and tie them to it by copying communications to them.
  • Question the plan and exit strategy before you start.
  • Confirm and test the due diligence.
  • Collate everything and ensure senior managers are copied in. They can’t ‘un-know, what you know’.

In a world that wrestles with ethics on a daily basis, the choices aren’t always linear. For this reason it is important when you come across unethical or criminal behaviour you report it, in written form, through the right internal channel. If you’re met with a closed system of either outright negation or denial, do not go back for another go.

Continue your role and do it in the best way possible but record everything. This can be uncomfortable and even make you feel treachourous, but if and when the issues you know come out you need a way to explain what you did, when you did it and why. It also provides you with a body of evidence if you believe the course of action is to report what you have found externally.

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