This study aims to evaluate the advantages and disadvantages of auditor mandatory suspicious activity reporting versus the exercise of professional judgement in the anti-money…
Abstract
Purpose
This study aims to evaluate the advantages and disadvantages of auditor mandatory suspicious activity reporting versus the exercise of professional judgement in the anti-money laundering regimes of the UK and the USA.
Design/methodology/approach
The research draws upon the following sources. Firstly, statistics provided by the UK National Crime Agency, 2019 (NCA) regarding suspicious activity report (SAR) filing rates. Secondly, anti-money laundering legislation in the USA and UK. Thirdly, statements made in the political domain in the USA, particularly those which raised constitutional concerns during the progress of the Patriot Act 2001. Finally, statements and recommendations by a UK Parliamentary Commission enquiring into the effectiveness of the suspicious activity reporting regime.
Findings
The UK reporting regime does not accommodate professional judgement, resulting in the filing of SARs with limited intelligence value. This contrasts with discretionary reporting in the USA: voluntary reporting guides and influences auditor behaviour rather than mandating it. Defensive filing by UK auditors (defence to anti-money launderings [DAMLs]) has increased in recent years but the number of SARs filed has declined.
Originality/value
The study evaluates auditor behavioural responses to legislative regimes which mandate or alternatively accommodate discretion in the reporting suspicion of money laundering. Consideration of constitutional and judicial activism in this context is a novel contribution to the literature. For its theoretical framework the study uses Foucault’s concept of discipline of the self to evaluate auditor behaviour under both regimes.
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This study aims to investigate the implications for financial innovation and product development of differences between schools of jurisprudence (fiqh) pertaining across regional…
Abstract
Purpose
This study aims to investigate the implications for financial innovation and product development of differences between schools of jurisprudence (fiqh) pertaining across regional Muslim markets, and the consequences for global financial institutions.
Design/methodology/approach
The methodology is qualitative, drawing upon several sources. Firstly, differences in interpretation regarding the economic and moral responsibilities of financial institutions in Islamic and secular contexts. Secondly, contrasting tenets of schools of Islamic jurisprudence regarding the permissibility of products traded intra Muslim markets. Thirdly, characteristics of complex financial instruments traded in global secular markets prior to the credit crisis of 2007–2008.
Findings
Differences between Islamic and global secular interpretations regarding responsibilities of financial institutions militate against integrated markets across which products can be seamlessly traded. Global financial institutions should recognise that different Islamic schools of jurisprudence prioritise either legal form or substance of financial products, but not both simultaneously. This should be considered when designing new products for regional Muslim markets.
Practical implications
Global financial institutions which focus upon the legal (micro) form of new Islamic products should relate in investor prospectuses and marketing materials the extent to which these accommodate Islamic jurisprudence’s equal (macro) concern for public interest or maslahah. This may comprise the reallocation of risk from those unable to bear it to those willing to assume it for a price, reinforcing rather than compromising economic stability.
Originality/value
This study evaluates implications for product development and marketing for global financial institutions active in regional Muslim markets across which different Islamic schools of jurisprudence apply.
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Free banking theory, as developed in Adam Smith’s 1776 treatise, “The Wealth of Nations” is a useful tool in determining the extent to which the “invisible hand of the market”…
Abstract
Purpose
Free banking theory, as developed in Adam Smith’s 1776 treatise, “The Wealth of Nations” is a useful tool in determining the extent to which the “invisible hand of the market” should prevail in regulatory policy. The purpose of this study is to provide a timely review of the literature, evaluating the theory’s relevance to regulation of financial technology generally and cryptocurrencies (cryptos) specifically.
Design/methodology/approach
The methodology is qualitative, applying free banking theory as developed in the literature to technology-defined environments. Recent legislative developments in the regulation of cryptocurrencies in the UK, European Union and the USA, are drawn upon.
Findings
Participants in volatile cryptocurrency markets should bear the consequences of inadvisable investments in accordance with free banking theory. The decentralised nature of cryptocurrencies and the exchanges on which these are traded militate against coordinated oversight by central banks, supporting a qualified free banking approach. Differences regarding statutory definitions of cryptos as units of exchange, tokens or investment securities and the propensity of these to transition between categories across the business cycle render attempts at concerted classification at the international level problematic. Prevention of criminality through extension of Suspicious Activity Reporting to exchanges and intermediaries should be the principal objective of policymakers, rather than definitions of evolving products that risk stifling technological innovation.
Originality/value
The study proposes that instead of a traditional regulatory approach to cryptos, which emphasises holders’ safety and compensation, a free banking approach combined with a focus on criminality would be a more effective and pragmatic way forward.
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Vahid Molla Imeny, Simon D. Norton, Mahdi Salehi and Mahdi Moradi
This study aims to identify the sources of laundered money in Iran and the destinations to which it is transferred, independently verified by auditors. Based on such data, the…
Abstract
Purpose
This study aims to identify the sources of laundered money in Iran and the destinations to which it is transferred, independently verified by auditors. Based on such data, the study aims to develop a simple model of endogenous and exogenous factors facilitating money laundering in developing countries, which can inform domestic and international legislative and regulatory responses.
Design/methodology/approach
Questionnaires were sent to Iranian certified public accountants who worked for auditing firms in 2019 and who have encountered suspected money laundering during their work with clients.
Findings
The government and public officials are the primary sources of money laundering activity in Iran. The main destinations of laundered funds are investments abroad, gold, foreign currencies, real estate and purchases of luxury goods. Domestic legislation, while bearing similarities with that found in other jurisdictions such as the UK and the USA, is flawed in several ways, including an inability to determine beneficial ownership of funds and weak enforcement.
Originality/value
Because of international sanctions and the prevailing political situation, it is difficult to obtain data for money laundering and other financial crimes in Iran. The data obtained is of importance to international bodies in understanding the nature of money laundering in Iran, and how to negotiate in the future to address mutual concerns. Given the country’s perceived high association with money laundering, the data obtained is of value in identifying the specific characteristics of the problem.
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Vahid Molla Imeny, Simon D. Norton, Mahdi Salehi and Mahdi Moradi
Iran has been ranked by the Basel Committee on Banking Supervision and the Financial Action Task Force (FATF) as one of the foremost countries in the world for money laundering…
Abstract
Purpose
Iran has been ranked by the Basel Committee on Banking Supervision and the Financial Action Task Force (FATF) as one of the foremost countries in the world for money laundering. However, Iranian banks claim that they comply with international standards for reporting suspicious activity, risk management and training. This paper aims to investigate this dichotomy between perception and reality.
Design/methodology/approach
A Wolfsberg-style questionnaire was sent to partners in Iranian accounting firms, which have audited domestic banks over the past five years to investigate the adequacy of risk management systems.
Findings
Most Iranian banks have anti-money laundering (AML) systems, which compare favourably with those of international counterparties. Banks take a risk-based approach to potential criminal behaviour. The negative perception of Iranian banks is principally attributable to the government’s unwillingness to accede to “touchstone” international conventions. In spite of having in place AML laws, which are comparable in intent with those of the UK and the United States of America (USA), weak enforcement remains a significant impediment of which the political establishment is aware.
Practical implications
Measures required to bring Iranian banks into compliance with international standards may be less extensive than perceptions suggest. However, failure of the government to accede to conventions stipulated by the FATF means that banks may remain ostracised by foreign counterparties for the foreseeable future.
Originality/value
This study provides a unique insight into the extent of AML compliance in Iranian banks as verified by external auditors.
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Simon D. Norton and Vahid Molla Imeny
This paper aims to compare products traded in secular and Islamic banking environments prior to the credit crunch of 2007–2008; to locate the comparison in a Schumpeterian model…
Abstract
Purpose
This paper aims to compare products traded in secular and Islamic banking environments prior to the credit crunch of 2007–2008; to locate the comparison in a Schumpeterian model of creative destruction of dynamic innovation in the capital markets; and to evaluate the implications for diversity of investor product choice.
Design/methodology/approach
Financial products are critiqued using qualitative criteria, including underestimation of risk implicit in mortgage-backed securities and securitisation, excessive speculative activity in credit default swaps and the magnification of leverage and volatility. Comparable Islamic products are considered for the extent to which they facilitate the same precursors of market crises.
Findings
Innovation in secular financial markets has traditionally led to asset bubbles, underestimation of risks and market exuberance. Islamic banking constrains creativity by prohibiting risk transference and disconnection of financing activity from social context and economic purpose. As such, the latter reduces Schumpeterian creative destruction but at the cost of reduced investor choice and market liquidity. Restriction of the reallocation of risk between those who do not wish to hold it and those who do dampens innovation but would have prevented the trading of products which contributed to the credit crunch.
Originality/value
The constraining effect of Islamic banking upon creativity and innovation is considered alongside its capacity to reduce market volatility, speculation and systemic instability. Schumpeterian theory deepens the analysis in terms of the drivers of innovation and market collapse.
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Vahid Molla Imeny, Simon D. Norton, Mahdi Moradi and Mahdi Salehi
Countries with high levels of corruption can experience collusion between powerful elites and accountants to conceal, disguise and clean the proceeds of criminality. This study…
Abstract
Purpose
Countries with high levels of corruption can experience collusion between powerful elites and accountants to conceal, disguise and clean the proceeds of criminality. This study investigates the willingness of accountants to report evidence of money laundering in an emerging economy, Iran, notwithstanding potential personal and professional risks implicit in such due diligence. It evaluates the relevance of personal characteristics of accountants to the propensity to report, and the implications for policy makers in terms of audit team composition.
Design/methodology/approach
The methodology is quantitative. Data was gathered by means of a suspicious activity scenario-based questionnaire administered to 1,128 of Certified Public Accountants in Iran, of which 281 responses were received. Four hypotheses were tested relating to the implications, if any, of gender, age, education and working experience for the propensity to report red flags indicative of money laundering.
Findings
Data revealed that accountants were generally more willing to report activity indicative of money laundering than was anticipated in an environment perceived to be characterised by professional and personal risks. Older accountants are more risk averse and more likely to report suspicious activity than younger counterparts who tend to disregard borderline indicators of money laundering. A significant red flag indicator of money laundering is a client's reluctance to provide information regarding controlling shareholders, debtors and creditors or to explain contrived and opaque corporate structures. Audit teams may be more effective when gender-balanced: female accountants tend to be more willing to report suspicious activity than male counterparts, reducing the risk of interference by powerful elites.
Research limitations/implications
The time frame over which the research was conducted was a single year; if it had been conducted over several years it may have revealed more nuanced and evolving reporting behaviour. The study was limited to Iran: a cross-comparison with another emerging economy or economies may have revealed useful contrasts.
Originality/value
The study contributes to behavioural accounting research in emerging economies. Limited empirical data is available regarding the influence of personal characteristics of accountants on their willingness to report suspicious activity in corrupt environments where personal safety and professional security may be at risk from powerful elites. It evaluates the implications of these for suspicious activity reporting policy, and for improving the effectiveness of the scrutineering role of audit teams. An innovative questionnaire was designed which may be suitable for future comparable research in emerging economies.
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Reem Ali Almakhfor and Simon D. Norton
Audit committees (ACs) have an important role to play in banks in Saudi Arabia in detecting and reporting weaknesses which may make financial crime possible. The Saudi Arabian…
Abstract
Purpose
Audit committees (ACs) have an important role to play in banks in Saudi Arabia in detecting and reporting weaknesses which may make financial crime possible. The Saudi Arabian Corporate Governance Code of 2016 comprises recommendations for ensuring the effectiveness of these committees, but cultural and behavioural factors can constitute impediments. This paper aims to explore these factors and makes recommendations.
Design/methodology/approach
The methodology is qualitative, using data derived from responses to a questionnaire administered to 180 current and former members of internal and external audit teams of Saudi Arabian banks.
Findings
ACs in Saudi financial institutions enjoy a high degree of functional independence of boards. Boards tend to regard ACs as part of the organisation: in contrast, AC members perceive their first duty as being owed to stakeholders. Disagreements between boards and ACs regarding disclosure of findings of systemic weaknesses which facilitate money laundering (ML) are made publicly available; this engenders transparency and avoidance of collusion. Professional qualifications and experience of AC members have improved substantially in recent years, equipping them to better discharge statutory duties regarding the detection and reporting of suspected ML.
Research limitations/implications
The regulatory body, the Saudi Arabian Markets Authority, should be diligent in ensuring the presence of non-executive directors in sufficient numbers to counterbalance influence by boards. Disagreements between boards and ACs regarding internal systemic changes to prevent ML and other financial crimes should be formally recorded in minutes and made public as a matter of record.
Originality/value
Questionnaire responses by past and present members of ACs are unique and contribute to the literature.
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Vahid Molla Imeny, Simon D. Norton, Mahdi Moradi and Mahdi Salehi
This study aims to compare judicial and auditor expectations of audit in the detection and reporting of money laundering in Iran. It also aims to assess the implications of…
Abstract
Purpose
This study aims to compare judicial and auditor expectations of audit in the detection and reporting of money laundering in Iran. It also aims to assess the implications of expectations gap for the reliability of data provided to the Financial Action Task Force (FATF) in its blacklisting policy.
Design/methodology/approach
Questionnaires were administered to auditors to determine perceptions of their anti-money laundering (AML) reporting obligations. These were also completed by Iranian judges who hear money laundering prosecutions and who agreed to participate in the research. The group was created through the “snowballing” technique.
Findings
There is significant divergence between judges and auditors regarding the latter’s AML reporting obligations. Self-perception among auditors regarding investigative duties is insufficiently aligned with expectations of the FATF, particularly where there is use of corporate structures, charities and trusts in which identity of true owners, of payers and payees of funds cannot be accurately verified. This gap presents a significant terrorist financing risk.
Practical implications
The expectations gap makes training in forensic accounting, as well as compliance with international reporting expectations, a matter of urgency for the Iranian auditing profession. The judiciary needs to be more aware of international expectations.
Originality/value
Data regarding judicial expectations of auditors’ AML reporting obligations is difficult to obtain and of a highly sensitive nature. This research has obtained such data which has relevance to the FATF blacklisting policy, and to international organisations tasked with disrupting terrorist financing networks.
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Marvin Soderberg, Suresh Kalagnanam, Norman T. Sheehan and Ganesh Vaidyanathan
The Balanced Scorecard (BSC) is widely applied as a performance measurement and strategy implementation tool by organizations. Research has revealed that the term “balanced…
Abstract
Purpose
The Balanced Scorecard (BSC) is widely applied as a performance measurement and strategy implementation tool by organizations. Research has revealed that the term “balanced scorecard” may be understood differently by managers both within as well as across organizations implying that the performance measurement systems implemented in organizations may not be similar to the construct envisioned by Kaplan and Norton. Using Kaplan and Norton's Balanced Scorecard construct as a basis, the paper aims to develop and test a five‐level taxonomy to classify firms' performance measurement systems.
Design/methodology/approach
A Balanced Scorecard taxonomy is validated using a large sample of professional accountants working in Canadian organizations.
Findings
The five‐level taxonomy is used to categorize the performance measurement systems of 149 organizations. It is found that 111 organizations' (74.5 percent) performance measurement systems met the criteria to be classified as a Basic Level 1 BSC, while 61 (40.9 percent) organizations have structurally complete Level 3 BSCs, and 36 (24.2 percent) organizations have fully developed Level 5 BSCs. The paper also discusses differences between Level 1 and Level 5 BSC organizations.
Research limitations/implications
While many researchers assume that organizations' performance measurement systems are similar in implementation level and use, the paper demonstrates that organizations are at different levels of BSC implementation and use, a factor that should be taken into consideration when designing empirical studies to test the efficacy of Kaplan and Norton's BSC.
Practical implications
The five‐level BSC taxonomy scheme provides managers working with Kaplan and Norton's BSC with a tool to plan their implementation steps and then benchmark their progress towards implementing a fully developed Level 5 BSC.
Originality/value
In developing and empirically validating a BSC taxonomy, the paper builds on and extends previous research on BSC implementation and its potential implications.