AML and the accountancy sector – Accounting for the cost of money laundering
“Because these figures are so huge, I think there’s a danger of accountants, particularly SMEs and sole practitioners, feeling distanced from it. But every accountant is at risk of being a target for money laundering and these billions of pounds come from a vast number of multiple sources.” – Elaine Smyth, the Association of International Certified Professional Accountants
Money Laundering & the accountant
Money laundering is big business. The United Nations Office on Drugs and Crime estimated the amount of money laundered globally in one year is 2 - 5% of global GDP, or US$800 billion - US$2 trillion.
The term "money laundering" is said to originate from Mafia ownership of laundromats in the United States. Meyer Lansky, affectionately called ‘the Mob’s Accountant’ or the ‘Godfather of Money Laundering’ searched for ways to hide money and discovered the benefits of numbered Swiss Bank Accounts. The use of the Swiss facilities gave Lansky the means to disguise illegal money by ‘loans’ provided by banks, which could be declared if necessary, and a tax-deduction obtained.
Lansky is not the only notable accountant. The article “The un-talked about sector in money laundering cases – the accountant”, highlight cartels using accountants (“contador”) to move and wash money.
Accountancy plays an important role in the financial system by facilitating transactions that support the UK economy. Therefore, accountants have to ensure that their services are not used for criminal purposes.
Accountants and the firm must be aware of the latest regulations relating to anti-money laundering and ensure that all staff and working practices are in a position to comply. Reactive compliance with regulatory requirements is not a solution.
In the UK government’s 2015 National Risk Assessment (“NRA”), the key risks around the accountancy sector was assessed to be: complicit accountancy professionals facilitating money laundering; collusion with other parts of the regulated sector; coerced professionals targeted by criminals; creation of structures and vehicles that enable money laundering; provision of false accounts; failure to identify suspicion and submit Suspicious Activity Reports (“SARs”); and mixed standards of regulatory compliance with relatively low barriers to entry for some parts of the sector.
The 2017 NRA noted that professional services such as accountancy are a crucial gateway for criminals looking to disguise the origin of their funds. That is, accountancy services have been exploited by criminals to provide legitimacy to falsified accounts or documents, create corporate structures or transfer value to conceal the source of funds.
The Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017, created a new entity within the Financial Conduct Authority (“FCA”), the Office for Professional Body Anti-Money Laundering Supervision (“OPBAS”). The OPBAS oversees the anti-money laundering (“AML”) and counter-terrorist financing (“CTF”) supervision by the 22 self-regulatory organisations in the accountancy and legal sectors.
In March 2020, the OPBAS released its report on progress made in tackling money laundering over the past year. Among the key findings are that the accountancy and legal professions have made strong improvements in their supervision of AML work. However, some professional body supervisors (PBSs) are still lagging behind their peers and must continue to raise their standards further. One year ago, 91% of relevant PBSs were not fully applying a risk-based approach to their supervision. One year on, only 14% are not yet driving supervisory activity by AML risk.
Therefore, accountants need to be vigilant and effective in their efforts to fight money laundering. Accountants also need to stay up-to-date with criminal tactics and their professional obligations.
Money Laundering Regulations – What must accountants do to comply?
The EU 5th Money Laundering Directive came into effect on 10 January 2020 and the requirements were transposed to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, as amended.
Under the Money Laundering Regulations, accountancy service providers are:
- Auditors who carry out statutory audit work;
- Accountants who provide accountancy services to clients;
- Tax advisers and consultants who provide advice to clients about their tax affairs;
- Payroll agents that provide accountancy services and/or tax advice; or
- Customs practitioners, freight forwarders and similar businesses if they provide accountancy or tax services.
The services provided can be recording, reviewing, analysing, calculating and reporting on financial information for other people. This includes:
- Professional bookkeeping services;
- Accounts preparation and signing;
- Giving a customer specific tax advice;
- Help with completing and submitting tax returns or duty claims;
- Advice on whether something is liable to a tax or duty; and
- Advice on the amount of tax or duty that is due.
If these services are provided virtually or through an automated service, customer due diligence will need to be performed on the client.
Accountancy service providers must register with HM Revenue & Customs (“HMRC”) unless:
- They are already supervised for Money Laundering Regulations purposes by a professional body; or
- All customers are themselves supervised by HMRC or a professional body.
If all customers are accountancy service providers supervised by HMRC or a professional body, or banks supervised by the FCA, then registration is not required so long as:
- You do not do business directly with the supervised accountancy service providers’ or the banks own customers;
- You’re included in the supervised accountancy service providers’ or banks anti money laundering controls and procedures, suspicious activity reporting, and training programmes; and
- You have a written contract with each of your customers confirming that every aspect of the relationship between you meets all anti money laundering requirements.
All the above conditions need to be met, otherwise registration is required.
Guidance on compliance
Guidance for the accountancy sector to meet AML and CTF requirements are published by HMRC and the Consultative Committee of Accountancy Bodies (“CCAB”).
Some of the elements accountancy service providers must have in place are:
- Firm risk assessment – this requires accountants to undertake and document a firm-wide risk assessment of activities to identify and assess the risks of money laundering and terrorist financing faced by the firm on at least an annual basis. The risk assessment should consider: clients, jurisdiction, services, delivery channels and transactions.
- Policies, procedures and controls – accountants must have written and up-to-date policies, procedures and controls in place to combat money laundering. These can be proportionate to the size and nature of the firm and its business activities. Appropriate policies and procedures should cover: client due diligence, training, record keeping, reporting and ongoing monitoring.
- Client due diligence – controls must be in place to ensure due diligence is undertaken before services are provided to the client. This involves processes to identify and verify the client (and beneficial owners) and obtain information on the purpose and nature of the business relationship or occasional transaction. It is important that a written record is kept of all client risk assessments and these are reviewed in accordance with the client’s risk profile including the degree of client due diligence measures such as enhanced due diligence.
- Ongoing monitoring – it is important that regular reviews and updates on AML policies and procedures are conducted. Also, ongoing monitoring of the client business relationship. The Nominated Officer / Money Laundering Reporting Officer and senior management should monitor the effectiveness of the review so that improvements can be made when inefficiencies are found.
- Training and awareness – staff need to be kept up to date with the necessary skills and knowledge to carry out their role and responsibilities. Members of staff who deal with customers or transactions in any way needs to understand the firm’s policies, controls and procedures. They need to understand the legal requirements, the risk of money laundering, checks they should undertake, and how to report suspicious activities.
- Record-keeping – Records should be kept of relationships with clients for at least five (5) years after a business relationship with a client concludes. Record-keeping is a constant theme in anti-money laundering compliance. Therefore, when policies and procedures are reviewed, records/files should checked to ensure they are being kept in compliance of the regulations.
- Supervision – it is critical that a firm not only has its own supervision standards, but that it is meeting them. This includes taking reasonable steps such as carrying out criminality checks on all beneficial owners, officers or managers especially, if they have an unspent Schedule 3 Money Laundering Regulations 2017 criminal conviction.
- Suspicious activity reporting – a firm must have specific internal reporting procedures for when a member of staff knows or suspects (or has reasonable grounds to know or suspect) a person is engaged in money laundering or terrorist financing. The Proceeds of Crime Act (“POCA”) not only includes offences for individuals directly involved in money laundering but also makes it a crime if a person fails to disclose knowledge or suspicion of money laundering. An annual review provides an opportunity for the Nominated Officer/MLRO to carry out an assessment of any internal suspicious activity reports and how this impacts the risk management of the firm.
Spotting the Money Laundering signs – red flags
The UK Financial Intelligence Unit Suspicious Activity Reports Annual Report for 2019 shows the volume of SARs reporting for accountants and tax advisers fell by 1.65% from 2017-18 to 2018-19. This evidence suggests that reporting suspicious activity requires more effort from the accountancy sector.
Criminals generally try to hide their real identity and ownership structure by performing complex transactions when they commit a money laundering crime. The determination of the client's real identity and purpose for the transaction/service will help accountants make informed decisions about the client and comply with the Money Laundering Regulations. Some red flags include:
- A long-term client starts making out-of-character requests such as, keeps asking for services outside of your or the firm’s expertise.
- A client is requesting arrangements that make no financial sense.
- Transactions that are unusual because of their size, frequency or the manner of their execution, in relation to the client’s known business type or activities.
- Activities involve complex or illogical business structures that make it unclear who is conducting the transaction or wanting the service.
- It appears that a client’s assets are inconsistent with their known legitimate income or source of funds.
- The client has taken steps to hide their identity, or the beneficial owner is difficult to identify.
- The client is unusually anxious to complete a transaction or they unable to justify why they need completion to be undertaken quickly.
The consequences of non-compliance
The accounting profession and the services it provides, represent money laundering vulnerabilities that must be addressed by the global AML regime.
In transaction-based work, accountants may not be the only professionals involved as there may be lawyers and banks acting too. Over-reliance on other professions to carry-out due diligence (whether or not formal third-party reliance is involved) may represent a vulnerability in such circumstances.
In areas of non-compliance with the Money Laundering Regulations, HMRC may impose measures, including a financial penalty and in more serious cases, it may consider criminal prosecution.
To date, accountancy service providers have been fined for breaches in failures to carrying out risk assessments; having the correct policies, controls and procedures; conducting due diligence; and record keeping  as well, breaches for failures to provide requested information or documents.
To protect yourselves from the threat of money laundering and preserve yours and the firm’s reputation, it is paramount to have a robust AML framework and programmes in place. This includes implementing adequate and appropriate systems and controls as well, embrace AML solutions for effectiveness and efficiency.
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This article was co-authored by Risk & Ethics Director (UK & Overseas), Lee Edwards.