Money Laundering

Combatting money laundering

By: 

Alex Byrne

27 November 2018

Alex Byrne sets out the ways practitioners can protect themselves from the charge of money laundering and looks at published guidance.

Related articles

• Protecting against money laundering
• New anti-money laundering regulations

KEY POINTS

• Why is money laundering so important to accountants?
• The application of the rules and examples of money laundering activities.
• Avoiding committing a money laundering offence
• The ‘Flag it up’ campaign and signs of money laundering.
• Risk assessment, potential tax fraud and deciding whether to report.

A dirty business

As the government relaunches its ‘Flag it up’ campaign against money laundering activity, Alex Byrne considers the important role played by accountants and tax advisers in combating the practice.

The Consultative Committee of Accountancy Bodies (CCAB) is the umbrella group of various chartered accountancy bodies: the ICAEW, ACCA, CIPFA, ICAS and Chartered Accountants Ireland. In March 2018, it published a new document, Anti-Money Laundering Guidance for the Accountancy Sector. My initial reaction was surely we did not really need a 73-page document that is not legislation and does not spell out the things to look for. Most accountants seek practical guidance on anti-money laundering, especially something they can pass on to staff to strike a balance between, at one extreme, failing to carry out the requisite procedures and, at the other, swamping the firm’s money laundering reporting officer (MLRO). However, on rereading, the guidance improves with familiarity.

Familiarity, not contempt

The anti-money laundering (AML) guidance has legal status, so accountants remaining unfamiliar with it or not applying its provisions do so at their peril. The regulations apply, with some exceptions, ‘to the persons (“relevant persons”) acting in the course of business carried on by them in the UK’. This includes (reg 8(2)(c)) auditors, insolvency practitioners, external accountants and tax advisers and (reg 8(2)(e)) trust or company service providers and company services in the UK, other than under a contract of employment.

The CCAB guidance confirms: ‘There is no definition given for the term accountancy services, however for the purposes of this guidance it includes any service which involves the recording, review, analysis, calculation or reporting of financial information, and which is provided under arrangements other than a contract of employment.’ So the regulations apply to businesses rather than their employees, although the latter will have responsibilities to ensure that the business is compliant.

The guidance also applies to bookkeepers, although it is suspected that many of these use their clients’ HMRC log-in details and are not registered with HMRC for AML purposes. But let’s begin with the basics to clarify money laundering and the measures that need to be taken to counter it – junior staff and some managers may have misconceptions.

What is money laundering?

In essence, money laundering is dealing with, or assisting someone else to deal with, the proceeds of crime; in other words, wealth of any sort – money, investments, land and buildings, cars and so on (Proceeds of Crime Act (POCA) 2002, s 327 to s 329).

Crime is defined as an action or omission that constitutes an unlawful act – an offence – and is punishable by law; for example, drug trafficking.

The ‘laundering’ is the legitimising of ‘dirty’ or illegal money obtained from crime, which cannot be deposited directly into a bank or other financial institution without raising questions. Consequently, criminals want to create financial records that give the money an apparent legitimate source. This might be by passing it through one or more legitimate businesses or using innocent individuals to deposit it in their bank accounts. By making the money appear to be from a legal source it is cleaned, hence the ‘laundering’ terminology. Anyone assisting with this even if not involved directly is also guilty of money laundering.

Large-scale criminal groups may use complex money laundering techniques to avoid detection, but there are other, more popular methods.

• Bulk cash smuggling. Cash is smuggled into another country and deposited in offshore banks or other financial institutions that ask few questions.
• Structuring. Also referred to as ‘smurfing’, cash is broken down into smaller amounts and used to purchase money orders or other instruments to avoid detection or suspicion.
• Trade-based laundering. This is similar to embezzlement in that invoices are altered to show a higher or lower amount to disguise the movement of money. For example, a car dealer may show a sale for £30,000, whereas the true receipt was £27,500. However, they bank £2,500 of criminal money at the same time, which is then drawn out and passed to the criminal less the dealer’s tax and share. The £2,500 has been legitimised and the net amount can be spent without questions being asked.
• Shell companies and trusts. These may be used to disguise the true ownership of a large sum of money.
• Bank capture. A bank is controlled by money launderers or criminals, who move funds through it without fear of investigation.
• Property laundering. This occurs when property is bought or developed with money obtained illegally, before being sold. Again, this legitimises the criminal funds and the proceeds can be spent without problem.
• Casino laundering. An individual buys casino chips with illegal money, gambles for a while, then cashes out the remaining chips with a cheque or bank transfer and claims this as winnings. However, casinos have been forced to tighten their AML procedures so this may now be more difficult.
• Money mule. Money is passed through an innocent individual’s bank account for which they are paid a commission. People are approached with different stories as to why this is necessary. Students in particular are susceptible. According to Cifas, the UK’s fraud prevention service, there were 8,652 cases of 18- to 24-year-olds having bank accounts used by criminals between January and September 2017.
• Cash-intensive business. A business that deals legitimately with large amounts of cash uses its bank accounts to deposit money obtained from everyday business proceeds and illegal money. The business declares the whole amount as legitimate. Commonly, such businesses provide services rather than goods and with low direct costs. Examples are strip clubs, nail bars, car washes and the like, but takeaways, night clubs and bars, convenience stores and restaurants may also be used.

Recent estimates suggest that between £36bn and £90bn is laundered through the UK economy each year. The amount that cannot be explained is seized.

Money laundering can be widespread and low key. For example, if a plumber pays a pub for drink with cash from an undeclared job, it is money laundering. The plumber is introducing dirty money into the legitimate money system. Of course, the pub may not be declaring all its takings, but that will not affect the plumber; they have obtained goods or services for the undeclared cash with no questions asked.

Omissions and accountancy service providers

Just knowing about money laundering imposes a legal duty to report it and, with some exceptions, a failure to report is a criminal offence. There is no de minimis threshold value for reporting.

Since accountants and tax advisers practise in the financial (‘regulated’) sector, they are subject to special regulations because they deal with the very financial transactions criminals want to legitimise. Accountants see bank accounts and know about clients’ earnings and expenditure. If a client has bank transactions that do not make sense or a more expensive house or car than would be expected from their business results or drawings, the practice has a duty to consider reporting this discrepancy to ‘a constable, a customs officer or a nominated officer’ (POCA 2002, s 338) unless there is an explanation with evidence.

Advisers must be aware of the importance of the anti-money laundering provisions because a failure to report is punishable by up to 14 years’ imprisonment and/or an unlimited fine. Further, civil penalties or criminal sanctions may be imposed on the business and any individuals in the business deemed responsible for failures.

In 2016, 1,435 people were convicted of money laundering in England and Wales. In R v Duff, the Court of Appeal upheld a six-month custodial sentence against a solicitor who had failed to report the receipt of £70,000 from a client to invest in a business when the client was later charged with drugs offences.

Avoiding committing an offence

Under paragraph 2.2.2 of the CCAB guidance, no offence is committed if:

• the persons involved did not know or suspect that they were dealing with the proceeds of crime; or
• a report of the suspicious activity is made promptly to an MLRO – in other words, an ‘internal’ suspicious activity report (SAR) is made within the accountancy practice; or
• a report of the suspicious activity is made promptly to the National Crime Agency (NCA) and before the offence takes place so that consent to proceed (referred to as a defence against money laundering by the NCA) is obtained in advance (POCA 2002, s 338, ‘Authorised disclosures’).

These are the exceptions most likely to apply, but the guidance does give others. To protect themselves, it is important for accountancy practices to train their staff to avoid unnecessary referrals while still complying with money laundering regulations. Section 5 of the CCAB guidance includes a table, Stages of CDD on customer due diligence.