"Anti-money-laundering (AML) technology has also seen significant advances. In particular, electronic verification (EV) technology has been developed and honed, enabling identity to be checked against secure data sources that are extremely difficult to forge."
The amended money laundering regulations (MLRs) that came into force on 10 January will, I suspect, have caught many accountants by surprise. It’s not that there wasn’t plenty of warning that they were coming – the Fifth EU Money Laundering Directive (5MLD) that gave rise to the regulations has been in force for eighteen months already, and the Treasury consulted on the new rules back in April last year. But the final AML regulations themselves were not published until Friday 20 December when many right-thinking people will have already downed tools for the festive season. In effect, firms were given little more than a week to prepare.
This is reflected in the guidance that has been issued by supervisory authorities, including the ICAEW and the FCA but, while firms will be granted some leeway to account for the tight timescales imposed on them, they will need to show they have a clear plan to comply and are taking steps to do so. In meeting their obligations, there are a number of important changes to the existing regulations which accountants will need to pay particular attention to.
Technology has moved on significantly since 2004, when the accountancy profession was first brought into the scope of the money laundering regulations (MLRs). In one sense, these technological advances have been a boon for would-be criminals, as it has made it much easier for them to produce fake or altered documents that are so convincing that only a real expert would be able to spot the deception.
Fortunately, on the other side of the ledger, anti-money-laundering (AML) technology has also seen significant advances. In particular, electronic verification (EV) technology has been developed and honed, enabling identity to be checked against secure data sources that are extremely difficult to forge. In particular, it is to all intents and purposes impossible to create a false credit reference trail so by using this data, identity can be securely established.
‘Reliable and independent’
While there was nothing in the earlier regulations to prevent these more modern methods being deployed, many have stuck with their outdated document-based processes, partly through inertia, but also because the existing regulations did not give clarity that EV could be treated as a ‘reliable and independent’ source of information. The new regulations remove any of these doubts and establish very clearly that EV can be used exclusively as a means of ID verification.
A technology-driven approach to anti-money-laundering (AML) compliance can also provide full screening against Sanction and Politically Exposed Person (PEP) lists and deliver results in just a few seconds. The benefits are not confined to initial onboarding: an electronic AML solution can deliver ongoing monitoring, and alert firms to any changes in their clients’ status, and regular revalidation to ensure compliance is maintained.
Customer due diligence
The amended regulations also feature changes to the Customer Due Diligence (CDD) regime relating to corporate clients. The Financial Action Task Force – the intergovernmental body that seeks to co-ordinate global anti-money-laundering and counter-terrorist financing – has set out tougher guidelines in this area and these have been transposed into the European Directive and now into the UK MLRs.
Where there is a complicated corporate structure, it can be difficult to establish who is ultimately in control. The amended regulations nonetheless require that accountants, along with other regulated sectors, “take reasonable measures” both to “understand the ownership and control structure” and to “verify the identity of the senior person in the body corporate responsible for managing” of a business. Accountants will need to be able to produce written records of the steps they have taken to do so, and any difficulties they have encountered in the process.
It is important to note that there is a difference between ‘establishing’ the identity of the ultimate business owner and ‘verifying’ their identity. Verification is more difficult to achieve, especially when dealing with complex business structures with holdings in different jurisdictions and with non-UK nationals.
Obligation to report discrepancies
There is also a new requirement to report discrepancies between the information held about a corporate client by Companies House, and any information that is unearthed as part of the onboarding process. The task is complicated somewhat by the fact that the definition of ‘ultimate business ownership’ is different from that for ‘people with significant control’ (PSC).
The key point is that accountants and others dealing with corporate clients will need to check the PSC register but will not be able to rely on that information for anti-money-laundering purposes. Indeed, the onus is on them to show that they have taken steps to establish its accuracy.
Last but not least, there are some seemingly small but potentially important changes to the rules around Enhanced Due Diligence (EDD) and when it should be applied, that accountants will need to be aware of as they assimilate the new regulations into their working practices.
Specifically, the regulations have been amended to make clear that EDD should apply “in relation to any relevant transaction where either of the parties to the transaction is established in a high-risk third country”. In other words, if a client based on the UK or similar ‘safe’ country, transactions with third parties in high-risk countries should still be subject to EDD.
The threshold for transactions were EDD should apply has also been subtly altered. Previously a transaction would need to be “unusually large” or part of “an unusual pattern of transactions” and “have no apparent economic or legal purpose”. But under the amended MLRs, accountants and others will need to apply EDD if any one of those conditions applies. Any unusually large transaction is now subject to EDD even if the reason for the transaction seems clear. Likewise, even ‘normal’ transactions are in scope if they do not seem to serve a useful purpose.
In all these instances, traditional due diligence processes are unlikely to be as effective as using sophisticated technology, which can draw on multiple trusted data sources with information from all over the world. Even if the same level of screening can be achieved manually, it will be a lengthy and drawn-out procedure, costing firms time and money that could be better spent serving clients, whereas a digital approach can achieve the same or, in nearly every case, better results in just a few minutes.
Wider use of electronic verification
In the UK, the Treasury consultation on the implementation of 5MLD in April 2019, explicitly asked if there were “any additional measures government could introduce to further encourage the use of electronic means of identification”.
While this is welcome, there is an argument it does not go far enough. At SmartSearch we have been open about our desire for the use of electronic verification to be made mandatory in the UK.
Nonetheless, there is a very clear direction of travel here: not only is EV achieving more and more commercial application, but governments and regulators are also beginning to understand the benefits of this technology.
Governments are very keen not to be seen to be ‘gold-plating’ regulation and in so doing imposing greater costs on business. But in this instance giving firms a nudge towards EV would actually save them money compared to traditional customer onboarding, as the Treasury consultation again appears implicitly to acknowledge.
The exposure of important sectors of the economy to financial crime – and the appalling activities it helps to finance – make it imperative that we do everything we can to combat money-laundering. Manual document checks simply don’t cut it in this day and age. The possibilities for fraud and even simple human error are just too great.
The accountancy profession is an important target for potential criminals, especially in the UK, in part because of the nature of the work accountants are involved in, but also precisely because it enjoys an unrivalled reputation for financial probity. In order to protect themselves from the threat of money laundering, and preserve that reputation, accountants should embrace digital AML solutions.