A quick recap of money laundering essentials to have in mind during tax return season.
The authoritative guidance by which accountants and their firms may be judged, ultimately, by disciplinary tribunals and the courts of law is issued by Consultative Committee of Accountancy Bodies (CCAB) and can be accessed here.
What is a ‘money laundering offence’?
Money laundering – includes all forms of using or possessing criminal property, as well as facilitating the use or possession of criminal property – regardless of how it was obtained.
Proceeds of Crime Act 2002 s327 states that a person commits an offence if he: conceals, disguise, converts, transfers or removes ‘criminal property’.
What is ‘criminal property’?
Property is defined as any sort of property, wherever it is situated, including money, all forms of property (real, personal and intangible) and things in action. Property is ‘criminal property’ if it constitutes or represents a person’s benefit from criminal conduct AND the alleged offender knows or suspects that it constitutes or represents such benefit.
Examples of the offences that will be caught by anti-money laundering regulations (AMLR) are:
smuggling, including drug trafficking and illegal arms sales.
What are an accountancy firm’s compliance responsibilities?
Firms are required to implement in-house systems and controls that meet the requirements of the AML regime. These should include:
adoption and continual monitoring and assessment of detailed policies and procedures to manage their own compliance with the Regulations including setting out the practice risk assessment in writing
appointment of a Money Laundering Reporting Officer
training to relevant employees to ensure awareness of the law and ability to recognise suspicious transactions.
Firm have the following duties:
the duty to carry out client due diligence (CDD)
the duty to report known or suspected involvement in money laundering
the responsibility to seek consent to act in respect of actual or possible involvement in money laundering activity
the duty not to ‘tip off’
What is Client Due Diligence (CDD)?
Client due diligence (CDD) is the procedure whereby a practising accountant takes steps to identify a prospective client, the purpose of which is to ensure that the accountant is able to comply with the dictum ‘Know your client’ (KYC)
Accountants should not only know who their clients are but should also understand the nature of their business.
CDD checks are made expressly subject to the assessment of risk (please see below how to assess the level of risk). Based on this assessment, the accountant should determine the extent of information that is needed (and, indeed, whether or not they wish to act for the client). Note that the CCAB acknowledges that no system of checks will ever detect and prevent all money laundering issues but a risk-sensitive approach of this kind will provide a realistic assessment of the risks
Simplified or enhanced CDD checks?
SDD can be applied when a client is low risk, in accordance with the businesses’ risk assessment criteria. CDD measures are still required but the extent and timing may be adjusted to reflect the assessment of low risk, for example in determining what constitutes reasonable verification measures. Ongoing monitoring for unusual or suspicious transactions is still required.
Enhanced measures and enhanced ongoing monitoring is required:
in any business relationship or transaction with a person established in a high-risk third country
where there is a high risk of MLTF
if a client or potential client is a political exposed person (PEP), or a family member or known close associate of a PEP
if a client has provided false or stolen identification documentation or information
if a transaction is complex and unusually large, or there is an unusual pattern of transactions
if the transaction or transactions have no apparent economic or legal purpose
in any other case which by its nature can present a higher risk of money laundering or terrorist financing.
What are the enhanced due diligence measure?
The enhanced due diligence measures must include:
as far as reasonably possible, examining the background and purpose of the transaction
increasing the degree and nature of monitoring of the business relationship in which the transaction is made to determine whether that transaction or that relationship appears to be suspicious
seeking additional independent, reliable sources to verify information provided or made available to the relevant person
taking additional measures to understand better the background, ownership and financial situation of the customer, and other parties to the transaction
taking further steps to be satisfied that the transaction is consistent with the purpose and intended nature of the business relationship
increasing the monitoring of the business relationship, including greater scrutiny of transactions.
Can reliance be placed on CDD carried out by others?
The 2017 Regulations (Part 4 s39) allow an accountant to rely on the CDD checks carried out by another person, such as, for example, the new client’s previous accountant. However, the new accountant must enter into arrangements with the third party which (amongst other things) enable them to obtain from the third party immediately on request copies of any identification and verification data and any other relevant documentation on the identity of the customer, customer’s beneficial owner, or any person acting on behalf of the customer.
The new accountant will remain fully accountable in case of any failure of compliance with the CDD requirements. Reliance can only be placed on certain classes of person, namely those that are covered by regulation 8 and Schedule 3 of the Money Laundering Regulations 2017.
For how long should CDD records be kept?
CDD records must be retained for a minimum of five years from the end of the business relationship or the date of any occasional transaction which might have been carried out.
What are the risk factors that should be considered?
When assessing whether there is a high risk of money laundering or terrorist financing in a particular situation, the following factors should be considered:
(a) customer risk factors, including:
the business relationship is conducted in unusual circumstances
the customer is resident in a geographical area of high risk
the customer is a legal person or legal arrangement that is a vehicle for holding personal assets
the customer is a company that has nominee shareholders or shares in bearer form
the customer is a business that is cash intensive
the corporate structure of the customer is unusual or excessively complex given the nature of the company’s business
(b) product, service, transaction or delivery channel risk factors, including:
the product involves private banking
the product or transaction is one which might favour anonymity
the situation involves non-face-to-face business relationships or transactions, without certain safeguards, such as electronic signature
payments will be received from unknown or unassociated third parties
new products and new business practices are involved, including new delivery mechanisms, and the use of new or developing technologies for both new and pre-existing products
the service involves the provision of nominee directors, nominee shareholders or shadow directors, or the formation of companies in a third country
(c)geographical risk factors, including:
countries not having effective systems to counter money laundering or terrorist financing
countries having significant levels of corruption or other criminal activity, such as terrorism, money laundering, and the production and supply of illicit drugs
countries subject to sanctions, embargoes or similar measures issued by, for example, the European Union or the United Nations
countries providing funding or support for terrorism.
Further guidance and future developments
Further guidance on anti-money laundering for the accountancy sector can be found on the ACCA website, on Joint Money Laundering Steering Group (JMLSG) website, National Crime Agency (NCA) website and HM Treasury website
A specimen of anti-money laundering policies and procedure can be found here.