Money laundering: your questions answered

Time was when money laundering was associated with terrorism and drug barons,
but for accountants and other regulated professions the reality is now much
closer to home.

Thanks to the money laundering regulations that have been in force for two
years, accountants have been set in judgement on their clients and expected to
report anything that they consider to be ‘suspicious activity’ to the National
Criminal Intelligence Service (NCIS). Failure to do so can result in draconian
penalties; including imprisonment for up to 14 years.

With such a sword of Damocles hanging over their heads you would expect
practitioners to be shopping their clients left right and centre, but if NCIS
was expecting an avalanche of suspicious activity reports (SARs) from the
accountancy profession, they will have been disappointed.

As we know from our discussions with firms in the independent sector, there
is still a great deal of confusion surrounding the money laundering regulations.

Many practitioners are unsure of what exactly constitutes ‘money laundering’;
quite understandable when you consider that there is actually no need for any
money laundering as such to generate a money laundering reporting requirement.

As HM Revenue & Customs helpfully explains in its public ‘Anti-Money
Laundering Strategy’ document: ‘All that is needed is the acquisition, use or
even possession of criminal property for money laundering offences to apply. So
the mere possession of the proceeds of tax evasion in someone’s wallet is
sufficient for money laundering to have taken place.’

To complicate matters further, there is no definition anywhere in the
existing legislation of what actually constitutes ‘suspicion’ when considering a
SAR.

The responsibility falls squarely on the shoulders of the accountant to
decide whether or not a client’s activities are suspicious under the terms of
the law.

Added to all this is the problem of confidentiality. This is not simply the
issue of client confidentiality and ‘privileged information’, but the problems
that could be attendant on being identified as a whistleblower by a client. Loss
of the business is a certainty, kneecapping a possibility.

It is therefore hardly surprising that so many practitioners have buried
their heads firmly in the sand, convincing themselves that all their clients are
squeaky clean and therefore the regulations cannot possibly apply to them.

Appointing a money laundering reporting officer (MLRO) to take the flak when
things go wrong is about as far as they have gone. To date, no accountant has
been banged up for failing to report a client, but it is only a matter of time.

Clearly, a great many firms need to address the whole issue of money
laundering as a matter of urgency. As with much new legislation the progress of
time highlights problem areas and some fine tuning is even now in progress to
clarify and improve the detail, but the fact remains that practitioners are
responsible for interpreting and implementing the rules correctly.

However, even the most conscientious of MLROs will come across situations
where the guidance on reporting is unclear. Generally, the tendency seems to be
to give the client the benefit of the doubt or to assume that, because a certain
situation has not been clearly defined it does not need to be reported. This is
a dangerous assumption and where any doubt exists it is always best to obtain
clarification rather than expose the firm to risk.

These are a few of the more common questions that crop up:

An accountant in London wants me to check and certify the identity of
a client he has obtained who lives locally to my firm. Can I do this?

Yes, but responsibility for identification rests with the other accountant,
who must be satisfied that identification procedures have been adequately
executed.

An expatriate client is seeking to return to the UK and wants to put
their tax affairs in order. How can I identify someone I have never met?

Your client should take their passport to a local lawyer who can notarise a
copy of it to confirm identity.

A director of a client company has resigned and I have heard that
fraud was involved. Do I need to report this?

Is this speculation or fact? There may be an impact on the company’s accounts
and, as the auditors, you are entitled to make enquiries. If your suspicions are
correct then, even if the client has not reported the matter to the police, you
must report them.

A client has financial difficulties. He plans to pay all his debts
with the exception of HM Customs & Revenue and then declare himself
bankrupt. Should I report this to NCIS?

Yes, your client is deliberately choosing to pay ordinary creditors prior to
preferential creditors.

Success in conforming to the money laundering regulations lies largely in
ensuring that all the people who have access to relevant client information and
not just the MLRO, receive the necessary training to enable them to spot the
warning signs. Until then many practitioners will be at risk.

Will we have to wait until there is a successful – and very pubic –
prosecution before firms wake up and grasp the nettle of money laundering?

Phil Shohet and Andrew Jenner are directors of Kato Consultancy

Progress to date

Following the introduction of the Proceeds of Crime Act 2002 there has been
an average 50% year-on- year increase in the number of SARs sent to the NCIS. In
2002 there were only 65,000, but this had risen to 154,000 in 2004 and the
estimated figure for 2005 is 225,000. However, reporting patterns across the
regulated sector are not standard.

Although the NCIS has in excess of 11,000 institutions registered as
submitting SARs, almost 80% of are sent by just 200 institutions, leaving the
remainder divided between all the professions that comprise the regulated
sector.

There has also been a general upward increase in the number of disclosures
made by accountants since the Money Laundering Regulations came into effect in
February 2004, but this needs to be put into perspective within the overall
picture.

We know that during the whole of 2004 only 8,018 SARs were submitted by
accountancy practices – just 5.2% of the total – and even though the number for
2005 is expected to be much greater, it still represents what must surely be the
tip of the iceberg – particularly when you consider that the vast majority of
the subjects of SARs employ firms of accountants.