8 minute read
Risk assessment
Avoid the risk of exploitation
The AIA Compliance team examine the circumstances where theremight be a high risk of money laundering or terrorist financing in the accountancy sector
The impact of money laundering is devastating – it enables serious organised crime such as modern slavery, drugs trafficking, fraud,corruptionand terrorism.
A comprehensive risk assessment is key to understanding the money laundering and terrorist financing risks that a business is exposed to. By knowing and understanding the risks to which the accountancy sector is exposed, HM Government, law enforcement and the professional body supervisors, as well as the accountancy firms themselves, can work together to ensure that criminals find it difficult to exploit accountancy services. The overall risk of money laundering and terrorist financing The Economic Crime Plan identifies economic crime as a significant threat to the security and the prosperity of the UK. Its impact is felt across our society. Fraud is now one of the most common crimes in the UK, with one in 15 people falling victim a year. Money laundering enables criminals to profit from some of the most damaging crimes. Bribery and corruption undermine fair competition and are barriers to economic growth.
The National Risk Assessment of Money Laundering and Terrorist Financing 2020 (NRA) states that accountancy services remain attractive to criminals due to the ability to use
them to help their funds gain legitimacy and respectability, as implied by the accountant’s professionally qualified status.
The accountancy services considered most at risk of exploitation continue to be: ● company formation and termination; ● mainstream accounting; and ● payroll.
The NRA also highlights other risk areas, which we have incorporated into the risk sections below.
The NRA concludes that accountancy services are at highest risk of being exploited or abused by criminals when the accountant doesn’t fully understand the money laundering risks and does not implement appropriate risk-based controls.
These risks can be well-managed through effective anti-money laundering policies and procedures, in line with the Anti-money Laundering Guidance for the Accountancy Sector. Firms should tailor their anti-money laundering policies and procedures to address the risks present in a particular service lines or clients.
Key risks relevant to the accountancy sector The risk of money laundering and terrorist financing is constantly evolving. Firms should regularly review the risk outlook to make sure they have identified all the areas relevant to their own business – particularly as the risk may evolve because of changes to the firm’s client base, geography and services provided. The risks listed here are not exhaustive. You may identify other circumstances particular to your firm, where there might be high risk of money laundering or terrorist financing. This document is intended to help the firm understand its exposure to risk and ensure that it has designed and applied the right procedures to mitigate that exposure.
Customers As part of the firm-wide risk assessment, the firm should identify the type of clients that it serves. The firm must consider the risk posed by its clients by identifying whether they present any of the following risks: ● clients seeking anonymity or undue secrecy; ● clients with a history of criminal activity; ● new clients outside of your normal client base; ● new clients – professional advisors; ● politically exposed persons; ● cash based businesses; ● other sectors highlighted by the NRA; ● clients with a changing business or involved in emerging sectors; and ● high net worth individuals.
Firms should reinforce the importance of an “enquiring mind” and employing professional scepticism – both in terms of the client due diligence performed and the scrutiny applied to the ongoing services provided.
Countries or geographies The firm should consider whether its clients are established in countries that are known to be used by money launderers or terrorist financiers, or whether another of the parties to the transaction is established in such a country. When determining geographic risk, factors to consider may include the perceived level of corruption, criminal activity and the effectiveness of money laundering and terrorist financing controls within the country. These include: ● countries that do not have effective money laundering and terrorist financing controls; ● countries with significant levels of corruption; and ● countries with organisations subject to sanctions.
Products or services Criminals are attracted to the accountancy sector as a way of giving legitimacy to businesses that are a front for money laundering. Accountancy services may be used to create corporate structures or help to legitimise the movement of proceeds of funds.
The following products or services may be at high risk of being used for money laundering or terrorist financing: ● trust and company services; ● legitimising books and records; ● payroll services; ● insolvency services; ● tax advice that leads to a reduction in tax liability; ● tax investigations where there might be a criminal element; ● investment business; ● probate and estate management; and ● central and local government support schemes.
Transactions Most accountancy services do not involve the facilitation of transactions. However, the following area may be at high risk of being used for money laundering or terrorist financing: clients’ money bank accounts.
There is a risk posed by accountants performing high value financial transactions for clients with no clear business rationale, allowing criminals to transfer funds through the client’s money account.
Accountants should not allow their client account to be used as a banking facility and should understand the rationale for why the client is using the firm’s clients’ money bank account before the transaction is initiated.
Delivery channels The way in which the firm provides its services to its client will affect the risk to the firm. Things to watch include: ● clients that you haven’t met; ● combining services: some services might not be inherently high risk, but when combined with other services or transactions become risky; and ● combining factors: risk will increase where multiple risks are present in one client or engagement.
Case studies The following case studies illustrate the importance of having a consistent approach to compliance with the Money Laundering Regulations. They have been constructed in collaboration with experienced financial investigators and give a stark warning of the possible consequences of involvement in money laundering, whether complicitly or through failing to ask the correct questions or not understanding the simple rules which create a robust internal control system.
Failure to report suspicion of money laundering “R” provided tax and accountancy services between January 2009 and November 2013 to limited company “C”, a supplier to the National Health Service. During this time, HMRC started an enquiry into the corporation tax return of the company, which continued into November 2013. Early in November 2013, the sole director and shareholder of the company told R that tax specialists had been engaged to deal with HMRC. He also disclosed that there had been an over-claim for mileage expenses submitted by that director, which the same specialists were also dealing with to negotiate a settlement with HMRC. R ended the business relationship with the company at this time.
In July 2014, R was interviewed under caution by police, where it was disclosed that the director had been involved in a large fraud against the NHS, involving the issue of false orders by company C and an NHS employee. R was charged with failing to disclose knowledge of the over-claim for mileage expenses which had been mentioned. There was no evidence that R was involved or knew about the fraud, but R was convicted of a single offence under the Proceeds of Crime Act (POCA) 2002 s 330 and was sentenced to a fine of £5,000 and a victim surcharge.
R had been in practice for over 25 years and the seriousness with which this case was taken illustrates why information coming to those in the regulated sector needs to be effectively assessed and dealt with. Under s 330 it is a criminal offence in England and Wales to know, suspect or have reasonable grounds for suspecting (during business in a regulated sector) that another person is engaged in money laundering and to then fail to disclose that to a “nominated officer” in the business.
Tax evasion Accountant “L” was responsible for a successful firm with over 5,000 clients, many of which were based in the media and entertainment business. Investigations by HMRC led to the arrest of “L”. A search of business premises revealed the use of inflated accountancy fees and fraudulent use of trading losses in the submission of tax returns intended to assist in the evasion of tax.
The clients were unaware of the issues and were allowed to settle with HMRC with an estimated £20 million to be recovered in settlement of outstanding tax positions. L was convicted of four counts of cheating the public revenue and sentenced to five years in prison. In addition, HMRC commenced confiscation proceedings to strip L of any financial gain made as a result of the criminal activity.
This is a fairly unique position in that L apparently used an extensive, wealthy client base to further criminal purposes. However, it illustrates that under the POCA 2002 a person can launder the proceeds of their own offending and that the proceeds of criminal activity can take many forms (in this case the £6 million subject of the four charges, all of which the clients were apparently unaware of). Equally, for those innocent individuals who find themselves in the midst of a Law Enforcement Money Laundering Investigation, the experience is intense and unlikely to be pleasant.
New AML Guidance for AIA Members New anti-money laundering guidance produced in collaboration with the Metropolitan Police is available for AIA Members in Practice.
Many accountants will come across suspicious activity in their preparation of yearend accounts and general business relationships with clients and it is important to recognise the warning signs of money laundering.
Money laundering is often linked to other serious organised crime such as drug trafficking, modern slavery and human trafficking: spotting and reporting suspicions can help to tackle economic crime.
