The Debate: Money laundering regulations

It’s a very mess laundry

By Peter Mitchell

When the accountancy professional woke up to the harsh realities of the money laundering regulations 2003, it was too late to achieve anything other than superficial change to a done deal between ministers and government agencies. No provision for meaningful consultation was provided and the protest mounted through MPs proved ineffectual.

Given the earlier close consultative involvement of our profession and other interested parties in the development of company law and audit thresholds, this all-embracing and imposed legislation is hugely disappointing, overly bureaucratic, untried and unwelcome. Argument for moderation focuses on two main issues ð the lack of a de minimus reporting level, and the creation of an environment where there is almost no adviser to whom you can speak in confidence without risking a report to NCIS.

The vast majority of tax returns are filed by small businesses or individuals, and it used to be that practitioners could steer those that stray back within the limits of the law. To whom will they now be able to turn if they know they are in danger of being ‘shopped’? They, the public, mostly remain blissfully ignorant of how this law affects them.

We should remember that NCIS only receives and collates data ð it does not investigate anything, referring information to the Inland Revenue, Customs and Excise, the police or whomever, for examination and possible action. It is evident that much reporting will never be acted upon by these agencies as trivial sums will not be pursued ð a huge waste of effort and money all round. It seems the UK’s interpretation of this European law is draconian and insensitive, with most member states including a de minimus value beyond which reporting makes some sense.

Commonsense, one hopes, will ultimately prevail and the bureaucratic thicket will be trimmed into a more sustainable and acceptable obligation. Until that time we just have to grin and bear it ð and comparisons with George Orwell’s police state 1984 are inevitable.

  • Peter Mitchell is chairman of The Society of Professional Accountants

Heed the warning signs
By Yehuda Barlev

There are reasons why when accountants discover fraud it has to be reported immediately no matter what its financial value.

We should remember the Cockroach Theory ð when you see one, you know there is a whole nest. Usually, if there is any significant accounting fraud, it is buried so deeply that neither auditors nor investigation agencies can find it. The chances that external auditors will discover the fraud are slim – but when they find fraud, the level of the audit to be invested has to be much higher.

In a recent case, we found that the management and the auditor of a large public entity had ignored a few red flags for more than three years. They indicated that an officer in the accounting section had inflated the monthly figures of taxes deducted from salaries and had transferred the inflated figures of over £400,000 to a third party against a private loan.

The cycle of fraud is such that it always tends to grow after a certain starting point, as the fraudster’s temptation usually forces him or her to increase the loot.

In most cases, the quantification of fraud is not obvious and demands a certain expertise. In a case about two years ago, the external accountants estimated the damage caused by the fraud at £40,000. Our expert opinion to the court indicated a fraud exceeding £600,000, which was accepted.

In cases of money laundering, we can sometimes trace money laundering activity involving small sums of money. Such activities indicate experiments of new routes and techniques of money laundering, which are later adopted if the company watchdogs were not alerted.

Then there is the timing question ð knowing when to report. It’s always better to throw a bucket of water on the match rather than waiting half and hour by which time the fire will have ravaged the house.

The dilemma of the accountant is at what level of discovery he will be blamed of negligence. The later the discovery, the greater the damage and the more obvious the call for negligence.

  • Yehudah Barlev, director of investigative auditors Barlev (UK) plc

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