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The new regulations
The EU Second Directive on Money Laundering required all member states to
have implemented the terms of the directive by 14 June 2003.
In the UK, this was implemented by the Proceeds of Crime Act 2002. The relevant provisions came into force on the 24 February 2003, but there was a transitional phase.
The new regime was brought into force in full by the Money Laundering Regulations 2003. These were published in November 2002 and were effective from September 2003.
The new regime appears to be extremely wide ranging and draconian - there are potentially 14 year prison sentences for handling the 'criminal property' defined below. Any person considering taking on the role of Money Laundering Reporting Officer (MLRO) should not do so lightly - an incorrect reporting decision could result in a five year prison sentence!
Failure to implement the required systems and required training could result in a penalty of two years imprisonment.
The previous regulations imposed onerous obligations on any relevant financial business. The new regulations extend similar onerous obligations to those conducting a relevant business defined to include Accounting Services, External Auditors, Tax Advisors, Insolvency Practitioners, Trust Managers, Company Formation Agents, Estate Agents, Casinos, Bureau de Change, Cheque Cashing Services, Money Transmission Services, Legal Services and Dealers in High Value Goods. (Dealing in high value goods is defined as accepting payment in cash or goods in part exchange to the value of €15,000 (approximately £10,000) in any single or series of linked transactions, and will typically apply to auctioneers, bookmakers, jewelers and car dealers.)
All tax advisers and accountants, whether qualified or not, are subject to the new regime.
Previously we were under a statutory obligation to report suspicions of money laundering in the case of the proceeds of crimes related to drug trafficking or terrorist activity. That obligation has now been extended to all 'criminal property'. That is defined to include -
Money deliberately diverted from taxable earnings to keep it out of the hands of the Inland Revenue will constitute the proceeds of tax evasion and consequently be 'criminal property' for this purpose.
If a client fails, within a reasonable time, to correct an underpayment of VAT to Customs & Excise which becomes apparent during the preparation of annual accounts, that is theft as the client has assumed the rights to money that belongs to Customs & Excise, and is therefore 'criminal property'.
If a customer inadvertently pays a bill twice, even if the amount is recorded as a credit balance on the sales ledger, to make no effort to inform the customer and make repayment is being defined as theft as the recipient intends to use the customers money as their own, and it becomes 'criminal property'.
Failing to comply with the reporting obligation can result in a penalty of five years imprisonment. The reporting obligation arises, not just when someone is suspicious, but when a hypothetical reasonable person would have been suspicious that another person has been engaged in money laundering which includes using 'criminal property' as in the examples above - being naive has become an offence.
There is a further offence of 'tipping off' which can also result in a penalty of five years imprisonment. If the records we examine might lead that hypothetical reasonable person to have a suspicion that business takings have not been fully recorded, we must not advise our client that we will have to make a report.
We would like all our clients to ensure that their records do not include any transactions which might arouse the suspicions of that hypothetical reasonable person.
In respect of any new business relationship formed from 1 May 2003 we are required to retain evidence on file to prove we have checked the identity and address of our clients. This will include all the partners or directors of a new business even where we have known those individuals for some time, so do not be surprised if we ask you to bring your passport and driving licence with you for a first meeting or next time we meet. We have to retain that information for five years from the date that the relationship ends. We will require to copy one item from the following identification list and a different one from the address list.
The government will implement new money laundering regulations this month, which will come into force in October 2003. These regulations, when combined with the Proceeds of Crime Act that was enacted in February, will demand a significant change in the way that accountants deal with clients.
At present we have to report suspicions of money laundering in respect of financial services activities if they relate to drug trafficking or terrorism. As you might expect, this is hardly a common occurrence, and in 2001 NCIS, the National Criminal Intelligence Service, received just over 100 reports from accountants, compared with over 30,000 in total.
The new regulations will extend the duty to report beyond financial services work to include, amongst other activities, accountancy services, tax work and trust work. In addition, it will extend to all money laundering activities, and not just those relating to drug trafficking and terrorism.
So what is the big change? Well, the Proceeds of Crime Act created a specific crime of money laundering, and links it to the proceeds of crime. As a result money laundering now includes dealing with the proceeds of ANY crime.
Most people will still not see this as particularly significant. After all, it only affects criminal activity doesn’t it? The point is that criminal activity is much wider than many realise. Consider the following scenarios:
1. Whilst preparing the accounts we realise that a client has incorrectly claimed VAT or made an error in his favour. We point this out to the client, provide for the additional VAT that is due. We also advise the client that he must rectify this. However the client tells us that he has just had a visit, and Customs didn’t spot it, so just forget it.
2. One of our clients takes goods from his retail shop for his private consumption, but only declares a small proportion to us. As a consequence his accounts show a lower profit than they should and the clients pays less tax than he should.
3. Another client issues an invoice to his customer for £600. At the end of the month the accounts department issue a statement. The next day a cheque for £600 arrives attached to a copy of the invoice. A month later another cheque for £600 arrives attached to the statement. When we prepare the accounts for the year some six months later we spot the £600 credit balance and ask our client about it. He comments that he suppresses negative balances when he issues his statements. If the customer orders from him again he will use the £600 against the cost of the goods. Otherwise he will carry the balance for a year or so and then write it off.
4. Whilst preparing the accounts for one client there is a significant cash payment to another client of ours for building work. When we do the builder’s accounts that payment is not included in his takings.
5. The landlord of a pub lives above the bar. He goes to the cash and carry 5 miles away each week, but apart from that most goods are delivered to him. He claims 50% of the running costs of his car as a business expense. This would equate to his doing about 100 business miles a week. Whilst not impossible, this does seem excessive.
Thankfully errors and mistakes do not constitute criminal conduct, provided of course that they are corrected as soon as practicable. However, in all these cases there appears to be an intention to gain a permanent benefit from another’s mistake or to avoid a legal liability. This is criminal conduct under the Theft Act 1968. As such, each of these cases would result in us “knowing or suspecting” that a client is involved in money laundering.
Every principal and employee within the firm has a personal duty to report such knowledge and suspicions to our money laundering reporting officer. He must then consider the report and decide whether it does indeed constitute “knowledge or suspicion”. If it does, then he must report it to NCIS. There is no exemption just because the amounts are small. All suspicions must be reported.
Failure on our part to report such “knowledge or suspicion” is a criminal offence, carrying a maximum of 5 years in jailed, an unlimited fine or both. You will not be surprised to learn that it is the firm’s policy not to commit criminal offences! As a result, all of the above scenarios would likely result in a report. The reports must be specific – who, what, where, when and how (including dates and amounts)!
On receipt of a report NCIS will check to see if any other reports of criminal conduct have been made relating to the individual or entity. If the report relates to tax avoidance (as in four out of the five examples) it will be passed on to the Revenue or Customs and Excise as appropriate. They will see all the details - chapter and verse! Accountants are not granted the equivalent of legal privilege so client confidentiality takes second place.
Our Institute’s ethical guide requires us to cease to act for a client in respect of his tax affairs if we know that he is defrauding the tax authorities. This does not apply to “mere suspicion”. Once these new money laundering regulations come into force all that will change. Whether we like it or not we, along with all other accountants, have been pressed into service as unpaid informants to the law agencies, and ultimately the tax authorities.
And the good news? NCIS is expecting the number of reports this year to rise to 100,000, and that may well be far too low. With all the reports of tax and other irregularities that will be submitted the black economy will certainly take a beating. Who knows, as the amount of tax revenues increases, we may even see a reduction in the basic rate of tax … but don’t hold your breath!
Update 8/11/2003
All of the above remains relevant although the transitional period is now expected to continue into early 2004.
There is an interesting case reported at http://www.moneylaunderingreporting.co.uk which includes example circumstances for any executor and any accountant.
Background and rules prior to 1 June 2003
The fight against crime demands that criminals are prevented from
legitimising the proceeds of their crime by the process of ‘money
laundering’. It is a process which can involve many outside the more obvious
targets of banks, other credit institutions and bureaux de change.
Professionals such as accountants and solicitors are at risk because their services could be of value to the successful money launderer. But the launderer often seeks to involve many other often unwitting accomplices such as:
The criminal offences created by the Money Laundering Regulations 1993 can be summarised as:
We and all accountants and our staff, whatever the nature of our work, must be particularly aware of the scope of these potential offences. The offences can be committed while working abroad.
The regulations require everyone who carries on a relevant financial business to establish and maintain specific policies and procedures to guard against their services being used for the purposes of money laundering. The Regulations apply to every such business, even if it has no reason to suspect that its clients could ever be involved in money laundering. These procedures are designed to achieve two purposes: firstly to enable suspicious transactions to be recognised as such and reported to the law enforcement agencies; and secondly to ensure that if a client comes under investigation in the future, a firm can provide its part of the audit trail. The Regulations cover:
Failure to comply with any of the requirements of the Regulations constitutes an offence punishable by a maximum of two years’ imprisonment, or a fine, or both. This is irrespective of whether money laundering has taken place.
Recognition of suspicious transactions
As the types of transactions which may be used by a money launderer are
almost unlimited, it is difficult to define a suspicious transaction.
Where there is an established client, a suspicious transaction will often be one which is inconsistent with that client’s known, legitimate business or personal activities. Therefore, the first key to recognition is knowing enough about the client and the client’s business to recognise that a transaction, or series of transactions, is unusual. Such transactions may arise at any stage, and frequently occur within an established relationship rather than at the outset.
Warning signs which can indicate that an established client’s transactions might be suspicious include:
Sufficient guidance must be given to partners and staff to enable them to recognise suspicious transactions. The type of situations giving rise to suspicions will depend on a firm’s client base and range of services. Firms might also consider monitoring the types of transactions and circumstances that have given rise to suspicious transaction reports, with a view to updating internal instructions and guidelines from time to time.
Reporting of suspicious transactions
In the case of the proceeds of crimes related to drug trafficking or
terrorist activity, there is a statutory obligation on all partners and staff to
report suspicions of money laundering.
All firms have a clear obligation to ensure:
Once a partner or employee has reported his/her suspicions to the MLRO, he/she has fully satisfied the statutory obligation.
The role of the Money Laundering Reporting Officer
Michael Studham is the MLRO for W. Fowles & Co, but the MLRO can be
anyone who is sufficiently senior to command the necessary authority.
The MLRO is required to determine whether the information or other matters contained in the report he/she has received give rise to a knowledge or suspicion that a person is engaged in money laundering.
In making this judgement, he/she should consider all other relevant information available within the firm concerning the person or business to whom the initial report relates. This may include making a review of other transaction patterns and volumes, the length of the business relationship, and referral to identification records held. If after completing this review, he/she knows or suspects that any person is engaged in money laundering, then he/she must ensure that the information is disclosed to the law enforcement agencies.
Care should be taken to guard against a report being submitted as a matter of routine to the National Criminal Intelligence Service without undertaking reasonable internal enquiries to determine that all available information has been taken into account. The MLRO has to determine whether or not the information or other matter contained in the report does give rise to a knowledge or suspicion that a person is engaged in money laundering. This implies a process with some formality attached to it. The MLRO will be expected to act honestly and reasonably and to make his/her determinations in good faith. Providing the MLRO does act in good faith in deciding not to pass on any suspicions report, there will be no liability for non-reporting if the judgement is later found to be wrong.
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