Financial crime is a growth industry worldwide. The U.S. Department of the Treasury estimates that the proceeds from extortion, healthcare fraud, identity theft, insider trading, the trafficking of illicit drugs, and other financially-motivated crimes total several hundred billion dollars each year in the United States alone.*

A major problem faced by criminal enterprises is laundering their dirty money, that is, concealing the origins of their cash resources. Crime syndicates employ a wide range of money-laundering schemes that range from large-scale, cross-border currency smuggling to sophisticated electronic subterfuges. These latter schemes include using repeated wire transfers to hopscotch funds through a maze of offshore bank accounts to obscure their original source. The ultimate goal of money laundering is to introduce the proceeds from financial crime into a nations banking system without drawing the attention of law enforcement and regulatory authorities.

U.S. federal statutes that criminalize money laundering include the Bank Secrecy Act of 1970 and the Money Laundering Control Act of 1986. These and other federal and state laws impose much of the responsibility for detecting and reporting money-laundering activities on U.S. banks and other financial institutions. A wide range of organizations offer anti-money laundering (AML) consulting services to help financial institutions satisfy this onerous responsibility. The Big Four accounting firms rank among the largest suppliers of such services. The website of PricewaterhouseCoopers (PwC), for example, recently provided the following overview of the services that the firm offers to financial institutions wanting to develop efficient AML compliance control programs. At PwC we have professionals that perform money laundering vulnerability assessments, compliance program evaluations, and gap analyses.* We can develop a recommended approach for reducing risk, enhancing risk management, and implementing operational solutions.

International terrorist organizations commonly use the proceeds from financial crime to finance their operations. Law enforcement and regulatory authorities around the world have implemented a wide range of measures to disrupt terrorism-inspired money-laundering networks. Because most major U.S. banks have significant operations within New York, that state has become a focus of money-laundering prevention and detection in our nation. In 2011, New Yorks legislature consolidated two existing state agencies to create the New York State Department of Financial Services (DFS). Governor Andrew Cuomo appointed Benjamin Lawsky to serve as the first DFS superintendent. Lawsky made one of his priorities working with state and federal law enforcement agencies to identify money-laundering rings that were funneling illicit cash through New York banks. Because of his proactive and aggressive regulatory philosophy, Lawsky quickly established himself as one of the most powerful governmental officials in the nations financial sector.*

Many large global banks fall under the regulatory purview of the DFS because they have a branch licensed to operate in the state of New York. These global banks include the Bank of Tokyo,* Japans largest bank, and one of the ten largest banks in the world. In 2007, reports surfaced that the Bank of Tokyo had secretly routed through New York banks $100 billion controlled by government agencies and private organizations in Iran, Myanmar, and Sudan. The U.S. State and Treasury Departments had previously blacklisted each of those three countries for sponsoring terrorism and other human rights abuses. Those sanctions prohibited funds from the three countries from entering the U.S. banking system. The transactions allegedly processed by the Bank of Tokyo through New York banks would have violated that financial embargo and statutory bans on money laundering.

The Bank of Tokyo retained PwCs Regulatory Advisory Services (RAS) division to investigate the $100 billion of alleged money-laundering transactions and to prepare a historical transaction review (HTR) report regarding them.* Because New York state banking agencies have historically had limited resources to dedicate to large-scale regulatory-related investigations, those agencies have routinely ordered financial institutions that they oversee to retain an independent consultant to carry out such investigations.* In turn, those agencies have relied on the resulting reports to decide what civil sanctions, if any, to impose on the given financial institutions.* The business press often improperly characterizes such reports as audit reports, particularly when they are prepared by the consulting division of a prominent accounting firm.

The PwC consultants completed the Bank of Tokyo engagement in 2008 and filed the HTR report with a New York state agency that was one of DFSs two predecessors. The report, which certified that the consultants work was objective and impartial,* confirmed the existence of the money-laundering transactions. In June 2013, after considering PwCs HTR report, the DFS reached a settlement agreement with the Bank of Tokyo that required the bank to pay a $250 million fine.

In August 2014, the DFS fined PwCs RAS consulting division $25 million and suspended it for two years to settle allegations that the firm improperly altered a report on a Japanese banks compliance with anti-money laundering laws.* These sanctions stemmed from the 2008 engagement completed by PwC consultants for the Bank of Tokyo. The DFS revealed that those consultants had repeatedly acceded to the Banks demands and redrafted the HTR Report in ways that omitted or downplayed issues of material regulatory concern.* Bank of Tokyo officials hoped that the watered down report would lessen the likelihood that their organization would be severely sanctioned by the DFS.

Information deleted from an earlier draft of the HTR report included the description of a method used by the Bank of Tokyo to interfere with PwCs investigation. During that year-long investigation, the PwC consultants had used robotic software to search for Bank of Tokyo transactions involving nations blacklisted by the U.S. State and Treasury Departments. To prevent that software from identifying and harvesting those transactions, Bank of Tokyo personnel had included non-alphabetic characters within the names of the blacklisted countries. For example, Sudan was included in Bank of Tokyos data files as Sud#an. The insertion of the pound sign caused PwCs robotic search engine to overlook references to that terrorist nation. PwC eventually discovered the ruse but deleted a discussion of it from the final version of the HTR report when instructed to do so by Bank of Tokyo officials. Another example of information excluded by PwC from the HTR report was Bank of Tokyos policy of stripping electronic messages of any information that related to countries blacklisted* by the U.S. State and Treasury Departments.

The questions raised concerning the integrity of PwCs HTR report persuaded the DFS to reconsider the June 2013 agreement that it had reached with the Bank of Tokyo. In November 2014, two months after announcing the $25 million fine levied on PwC, the DFS fined the bank an additional $315 million for obstructing PwCs investigation.

PwCs effort to help the Bank of Tokyo downplay the significance of its money-laundering activities caused Benjamin Lawsky to lash out at the consultants that his agency heavily relied upon in policing the banking industry. When bank executives pressure a consultant to whitewash a supposedly objective report to regulatorsand the consultant goes along with itthat can strike at the very heart of our system of prudential oversight.* One year earlier, in 2013, the DFS had fined consultants from Deloitte $10 million for helping Standard Chartered, a huge British bank, avoid detection of its money-laundering activities.* , * At the time, Lawsky had berated such consultants for their stunning lack of independence.* In response to that criticism, the New York Times pointed out the inherently flawed nature of DFSs policy of allowing banks to choose the consultants to investigate potential violations of banking laws and other regulatory infractions. The consultants are handpicked and paid by the banks they are supposed to examine.*

Critics of the Big Four firms maintained that the monetary penalties the DFS imposed on PwC and Deloitte were not sufficiently punitive to discourage the massive firms from engaging in self-serving behavior for their large banking clients. The International Consortium of Investigative Journalists (ICIJ) ranks among the harshest and most persistent critics of the Big Four firms. Following the Bank of Tokyo scandal, the ICIJ referred to an earlier high-profile controversy involving KPMG in which tax partners of that Big Four firm structured improper tax shelters for wealthy clients. A U.S. Senate investigation revealed that a senior KPMG official had applied a cost-benefit analysis to circumstances in which his firm faced potential monetary fines for recommending inappropriate tax shelters. According to the Senate report, that individual coldly calculated that the penalties for violating the [given IRS rules] would be no greater than $14,000 per $100,000 in fees that KPMG would collect.* Based upon this analysis, the KPMG official urged his firm to ignore the IRS rules.*

PwCs Bank of Tokyo engagement was a consulting service, not an attestation service. Do the professional standards for both types of services require the given practitioners to be independent of their clients? Explain.

Describe how the Bank of Tokyo engagement could have been modified to qualify as an attestation service rather than a consulting service. Identify the advantages and disadvantages of making that change in the engagement.

Would it be improper for PwC to prepare an HTR report for a bank for which it also provided anti-money laundering services? Defend your answer.

Is it unethical or otherwise inappropriate for accounting firms to apply a cost-benefit analysis similar to that allegedly applied by the senior KPMG official? Defend your answer.