Reporting responsibilities of Accountants under POCA 2002

 

We are seeing an increasing number of confiscation hearings under POCA 2002 arising, in the first instance from individuals and companies being found guilty of offences of trading without the appropriate licences. The cases that spring to mind concern waste management offences and cases taken by environmental agencies. The most recent case that i read of was a security company that provided a large number of door staff to pubs being prosecuted for operating without a licence contrary to Section 3 of the Private security Industry Act 2001. Clearly, the number of regulators vigorously using the confiscation legislation is increasing.

 

As conviction in Crown Court for trading without the necessary licences invariably triggers confiscation proceedings under POCA 2002, surely accountants in practice must start taking a fresh look at their own reporting procedures under the same legislation?

 

In November of last year the Serious Organised Crime Agency  SOCA  published its annual report of Suspicious Activity Reports (SARS) received in the year ended September 2010. Overall, there were 240,582 SARS received and as expected the vast majority were from the banking sector, which contributed 78.31% of all SARS received by SOCA. Accountants made  6,390 or 2.97% of the total reports.

 

At the lower end of the scale are the no-audit clients, who require to be licensed to carry out their business activities. What steps, if any, does their accountant think he has to take to ensure that they are trading legally?  Does he simply assume that they are trading legally until he actually learns or suspects that this is not the case?  

 

The position radically changes when, for example in discussions on accounts,  the client tells  him that he still hasn’t received the licence that he says he has applied for.A higher level of enquiry is demanded in the cases of  the audit client who requires licences. There is an obligation for adherence to International Standard on Auditing ISA 250 , “Consideration of Laws and Regulations in an Audit of Financial Statements”

 

 

Comments
davidwinch's picture

Reporting under s330 PoCA 2002 / MLR 2007

davidwinch | | Permalink

Gerard

The reporting requirements under s330 PoCA 2002 / MLR 2007 are that when, on the basis of information which has come to him, someone working in the 'regulated sector' (such as someone providing accountancy or taxation services for his firm's clients) knows or suspects, or has reasonable grounds to suspect, money laundering (whether by his client or a third party) he is obliged to report it (subject to certain exceptions).

So PoCA 2002 / MLR 2007 do not oblige accountants to make enquiries of their clients for the purpose of eliciting additional information which might - when it is received - give grounds for suspicion.

So in answer to you question, "Should the accountant simply assume that his clients are trading legally until he actually learns or suspects that this is not the case?", I would say (from a PoCA / MLR perspective), "Yes, that is exactly what he should do".

Of course, from a professional point of view the accountant may wish to be more pro-active.  In the case of an audit client he may be obliged by professional standards to be more pro-active.  But these are not requirements stemming from PoCA / MLR.

David

cymraeg_draig's picture

Ignorance is bliss

cymraeg_draig | | Permalink

Sometimes, if you are not required to know, it's better not to ask.

 

 

I agree

The Black Knight | | Permalink

Some questions are best left unasked in the current climate,

being too helpful may leave a smoking gun on your file.

there are so many regulations now that I doubt whether small business has even heard of them let alone complies and I would think that if you started asking questions everyone would be guilty of something and your entire day would be taken up writing up suspicious activity reports.

added to which, if the client did not know any better how could it be deliberate ?

unfortunately we are all now forced to play to the whistle.

Blinkers on I think.

Gerard Murray's picture

Consequences of Being Afraid to Ask the Obvious

Gerard Murray | | Permalink

 

 

When I approach any aspect of the Proceeds of Crime Act 2002 I am reminded of the salutary words of Lewis Carroll-‘Beware the Jabberwock my son! The jaws that bite, the claws that catch.’

 

 I have the uncomfortable feeling that too many of the posts have missed the point in taking too defensive an attitude to the issue of reporting suspicious activity. .When POCA 2002 was introduced there were murmurings about tax offences that might have been committed by clients but the issue has now mushroomed.

 

Let’s explore the case where as an accountant you have a non-audit client in the waste disposal industry. Twenty years ago you may simply have been asked  ‘do my books.’ This simple assignment  consisted of the following- prepare the accounts make the tax return and see him next year.

 

 The relationship has greatly changed in the intervening period. Firstly, you now regard yourself as providing a financial service, which requires you having a broad oversight into your client’s affairs to offer best advice even before the client is aware of his need for such advice.you have the opportunity to assist your client to remedy his position by advisisng him to become fully compliant before the law catches up eith him. you can be sure that shoulf e fail to regularise his affairs the law will eventually catch uo with him and order him to stop trading until he has the necessary licences, Failure to so do may mean that he will eventually be prosecuted and come under POCA confiscation proceedings

 

Into this new set of relationships is pitched the Money Laundering Regulations 2007 and this new concept of Know Your Client. Can it be seriously suggested that as an accountant in practice knowing your client means not asking the obvious questions as to his business activities?

 

Let’s jump forward to that unfortunate day when you are in the dock charged with failure to  report suspicious activities under POCA. There is a growing number of such real-life situations. The line of questioning  goes as follows:

 

 Prosecutor: ‘You have been an accountant in practice for several years. Are you  aware that the law requires companies in the waste disposal business to be licensed and regulated ?

 

 Accountant:’ I am fully aware of the regulatory requirements.

 

‘Prosecutor: ‘When this company became a client did you carry out all the checks commonly referred to as Know Your Client?’

 

 Accountant: ‘I did.’

 

Prosecutor: ‘Did you enquire as to whether the company had the licences required to enable it to carry out its activities legally?’

 

 Accountant: ‘No.’

 

Prosecutor: ‘Why not?’

 

Accountant: ‘Because I was afraid they might tell me that they did not have the necessary licences, in which case I would have been required to make a report  to SOCA.’

 

 It strikes me that turning a blind eye to the seemingly obvious is too dangerous a position to take. Are you all still sittingly comfortably? 

cymraeg_draig's picture

.

cymraeg_draig | | Permalink

Prosecutor: ‘You have been an accountant in practice for several years. Are you  aware that the law requires companies in the waste disposal business to be licensed and regulated ?’     Accountant:’ I am fully aware of the regulatory requirements. ‘    

There's your first mistake - there is no legal requirement for an accountant to have any knowledge of trade licencing & regulation requirements.  Just as he is not required to check to see if a restraunts kitchens are hygenic or not.

 

Prosecutor: ‘When this company became a client did you carry out all the checks commonly referred to as Know Your Client?’    Accountant: ‘I did.’    Prosecutor: ‘Did you enquire as to whether the company had the licences required to enable it to carry out its activities legally?'    Accountant: ‘No.’    Prosecutor: ‘Why not?’    

Because there is no legal requirement to do so.

 

 

 Are you all still sitting comfortably?

Very -  I'd be happy to defend anyone facing the above scenario, and to seek damages for malicious prosecution as a prosecution based on the circumstances you set out would be without any legal foundation.

davidwinch's picture

Accountants not lawyers?

davidwinch | | Permalink

Gerard

I have a great deal of respect for the contribution which you make to this discussion group but on this issue I take a rather different stance from yourself.

I think I may know rather more about criminal law than the average accountant in practice, but I am continually coming across laws of whose existence I was previously unaware - and which might involve criminal contraventions by seemingly law-abiding clients in business.

I would expect most accountants to know a good deal about tax law.  So I would expect an accountant acting for, say, a self-employed individual in the building trade to be aware of CIS tax requirements.

But would the average accountant be aware of, say, the rules relating to the employment of persons via gangmasters in the agricultural sector and the role of the Gangmasters Licensing Authority?

Would the average accountant understand the law relating to the employment of immigrants (and potentially illegal immigrants)?

Would the average accountant understand the criminal law implications of a breach of a local authority planning enforcement notice?

Would the average accountant be aware of the criminal law aspects of misleading actions or omissions under The Consumer Protection from Unfair Trading Regulations 2008?

You yourself refer to licensing breaches in relation to waste disposal.

In my view the accountant is not a lawyer and he should not expect himself to be in a position to be aware of all the legal obligations of his clients.  He should, in my view, avoid giving his clients the impression that he is in a position to give them legal advice relevant to their business.

There is a danger that he could inadvertently take on responsibilities which he cannot satisfactorily discharge - and then find himself in the firing line for failing to alert the client to one of his legal obligations.

So the furthest I think the accountant should go is to ask the client whether he (the client) is aware of any breaches by him of the criminal law.  If the client's answer is "No" then the accountant should accept that unless he is aware, or becomes aware, of some criminal law problem relating to the client.

In many cases however I do not think the accountant is obliged to go even that far.  I do not think he is obliged to ask that question by MLR 2007 / PoCA 2002 customer due diligence / know your client.

He may well be required to ask that question as part of an audit assignment.

Of course if the client's answer is "Yes, we have a criminal law issue in connection with . . . " the accountant has then to consider his position with regard to reporting under MLR 2007 / PoCA 2002 in the light of the information which then has come to him.

But let's not go searching out trouble just on the basis that we might unearth some problem if we do.

Kind regards

David

Gerard Murray's picture

Nelson's Blind Eye

Gerard Murray | | Permalink

 

 

Somehow, I just can’t get the words of Lord Millett in Twinsectra Ltd V Yardley & Others out of my head. At para – 112 he opined ‘. There was a gloss on this. It is dishonest for a man deliberately to shut his eyes to facts which he would prefer not to know. If he does so, he is taken to have actual knowledge of the facts to which he shut his eyes. Such knowledge has been described as "Nelsonian knowledge", meaning knowledge which is attributed to a person as a consequence of his "wilful blindness" or (as American lawyers describe it) "contrived ignorance". But a person's failure through negligence to make inquiry is insufficient to enable knowledge to be attributed to him. ‘  In civil law it may be insufficient to enable knowledgebut what about suspicion being attributed? .

cymraeg_draig's picture

Lord Millett

cymraeg_draig | | Permalink

 

Unfortunately Lord Millett was disingenuous.

A barrister representing, say an alleged rapist, has a duty to represent his client to the best of his ability.

If the client states he is innocent, then you have a duty to try to prove his innocence, and of course, to push the fact that your client is innocent.

However, if the client says he did in fact do it, but wants to plead not guilty anyway, then you cannot actually state to the court that your client is innocent (that would be lying), nor can you say to the court that your client is guilty (that would breach client confidentiality), so, you must put the prosecution to the test and make it prove it's case - its possible to totally discredit the prosecution case but less likely to be successful.

So, I can assure you, that no barrister in the criminal courts would dream of actually asking a client straight out - "did you do it".  He doesnt want to know.

And Lord Millett, before becoming a judge, would have done exactly the same, so his comments were, I'm afraid, hypocitical in the extreme.

 

carnmores's picture

well said Hypocrisy is abroad everywhere

carnmores | | Permalink

a lot of judges are disengenuous  arent they?

davidwinch's picture

Knowledge and suspicion

davidwinch | | Permalink

Gerard

You may be aware of the criminal case of Westminster City Council v Croyalgrange Ltd [1986] UKHL 9 in which the Council prosecuted a company for allegedly operating a "sex establishment" without the required licence.  It was necessary for the prosecution to show that the company had "knowingly used, or knowingly caused or permitted the use of, any premises" requiring a licence without the appropriate licence.

The House of Lords judgment includes the following:

"it is always open to the tribunal of fact, when knowledge on the part of a defendant is required to be proved, to base a finding of knowledge on evidence that the defendant had deliberately shut his eyes to the obvious or refrained from inquiry because he suspected the truth but did not want to have his suspicion confirmed".

However Archbold (the well respected legal text) at para 17-49 indicates that equating "knowledge" to "shutting one's eyes to the truth" is a proposition which "should be treated with great caution".

The CCAB money laundering guidance (which has been approved by HM Treasury) says bluntly (at para 2.25):

"Having knowledge means actually knowing that something is the case".

The CCAB guidance (having been approved by HM Treasury) is definitive for accountants in this regard.

However the issue in relation to reporting to your MLRO / SOCA under s330 PoCA 2002 / MLR 2007 is whether one "knows or suspects, or has reasonable grounds for knowing or suspecting" that someone is engaged in money laundering.

Clearly the House of Lords judgment in Croyalgrange was considering a case in which a person did, at least, suspect what he is alleged to have known - and that would be enough in the case of an alleged failure to report.

But the CCAB guidance continues (at para 2.26):

"Case law suggests that suspicion is a state of mind more definite than speculation, but falls short of knowledge based on evidence. It must be based on some evidence, even if that evidence is tentative – simple speculation that a client may be money laundering is not sufficient grounds to form a suspicion".

I am happy with that - the suspicion "must be based on some evidence".

But just because, say, your client's business is waste management that does not, in my view at least, give grounds for suspicion that the client may be contravening waste management regulations - although of course that is a possibility.

I do not think that possibility makes it incumbent upon the accountant to make further enquiries because the MLR 2007 / PoCA 2002 refer to information which "came to him".

In that (ahem) beautifully written tome "Money Laundering for Lawyers: The new requirements and their practical implications" by Bazley and Winch (Butterworths, 2004) at para 5.6 it says:

"where a person deliberately or wilfully shuts his eyes or deliberately refrains from making inquiries or actively deters a person from making disclosures, he does so for some reason, and that reason is that he suspects some wrongdoing".

Since 2004 I have reined back from that view somewhat.  I think it would be preferable to say that if a person suspects some wrongdoing and deliberately or wilfully shuts his eyes or deliberately refrains from making inquiries or actively deters a person from making disclosures, that deliberate failure to pursue enquiries will not save him from committing the 'failure to report' offence.

David

(P.S. The book written in 2004 is now considerably out of date and is not a reflection of the current state of the law.)

Gerard Murray's picture

Knowledge and Suspicion

Gerard Murray | | Permalink

Dear David

 Firstly, the average accountant in practice is being squeezed increasingly by the POCA 2002 legislation. When introduced, the average accountant in practice became aware that tax offences were covered by the new regime. As other posts on the site have confirmed that number of agencies prosecuting under POCA is annually increasing.

I would expect that the average accountant in practice is becoming aware that regulatory agencies are extending their muscle and should at least consider the potential implication of this. Accountants are not the gatekeepers in the same way as lawyers in relation to POCA. However, even the average accountant in practice should be aware that an increasing number of his clients are regulate and licensed and I am concerned that the need to ‘Know Your Client’ is placing a greater onus on the average accountant in practice, without even considering the position of audit clients.

 

I as recently reviewing the Money Laundering Procedures Manual of one of the UK’s largest providers of training and support services to the accountancy profession and was interested in its position on knowledge and suspicion. With regard to the former, it stated ‘Generally speaking, knowledge is likely to include:

·        actual knowledge;

·        shutting one’s mind to the obvious;

·        deliberately refraining from making inquiries, the results of which one might not care to have;

·        deliberately deterring a person from making disclosures, the content of which one might not care to have;

·        knowledge of circumstances which would indicate the facts to an honest and reasonable person;

·        knowledge of circumstances which would put an honest and reasonable person on inquiry, but failing to make reasonable inquiries, which such a person would have made.

This suggests to me that the responsibilities for even the average accountant in practice have been increased with the advent of the Money Laundering Regulations 2007. I would agree with your comment-

-‘ So the furthest I think the accountant should go is to ask the client whether he (the client) is aware of any breaches by him of the criminal law.  If the client's answer is "No" then the accountant should accept that unless he is aware, or becomes aware, of some criminal law problem relating to the client.’

However, the difference of emphasis is that by posing this making this question the average accountant in practice is demonstrating that he is making inquiries of his client and recording the answers. This, I think is preferable to asking no question for fear of receiving the wrong answer.       

davidwinch's picture

Knowledge

davidwinch | | Permalink

Gerard

I think the manual which you quote is (strictly speaking) incorrect insofar as it is at odds with the CCAB guidance which I have quoted on the meaning of "knowledge" - and bear in mind s330(8) PoCA 2002.

But of course the test for reporting is not simply "knowledge" but knowledge or suspicion or reasonable grounds to suspect.

The circumstances which you list would all, in my view, fall within the scope of knowledge, suspicion or reasonable grounds to suspect (and so would trigger a need to report in the absence of further information which removes the suspicion).

David

reasonable grounds

The Black Knight | | Permalink

I think we cannot be reasonably expected to be responsible for all of the sins of the world, particulary if they are outside our terms of engagement or detailed knowledge for that matter ! Reasonable ! Accountant not expert laywer.

are there any breaches of legislation that you are aware of ? or that may affect the entity's ability to continue as a going concern. Might be sensible questions to ask but not required on a non audit job.

then try the catch 22 position of having got a reply and because of the answer the directors now have serious concerns (or would have if they knew you had reported them) that the entity is a going concern. The directors having traded happily for years (in breach of whatever legislation) do not consider that this is worthy of a note as you would require, you refuse to be associated with a set of accounts which you believe are misleading and resign.

The end result is most probably, the client finds another accountant with a different mindset who is also able to offer tax evasion as well, the authorities do nothing as usual (the odd unpublicised case being the exception) etc etc etc.

We have enough trouble already, lets not go looking for more ! It would be different if we were getting paid but this legislation already costs a great deal, adds no value and a lot of the competition pays no attention to it whatsoever.

 

cymraeg_draig's picture

.

cymraeg_draig | | Permalink

Gerard, going back to your original example of a waste disposal licence, the whole point is that an accountant is responsible for taxation & finance - he is not responsible for ensuring that his clients are properly licenced to carry out their trade, or that they comply with health & safety legislation, or anything else outside the accountants remit. 

Such matters are the responsibility of environmental health, trading standards, etc etc., not the accountant.

 

I have been assured by a very senior member of the government that this law is being reviewed and will be drastically changed before 2015 as it is recognised that it is not being used in the way that parliament intended - the sooner the better.

 

carnmores's picture

good to hear

carnmores | | Permalink

all this nonsense about ' know your client' is beimg stretched like a bit of old elastic , well its going to snap isnt it

davidwinch's picture

A problem with the confiscation legislation

davidwinch | | Permalink

One of the problems with the confiscation legislation is that it permits no discretion to the judge to vary the amount of the confiscation order to reflect what may be fair or just.

Parliament deliberately used expressions such as: "The Crown Court must proceed under this section" (s6(1)), "The Court must proceed as follows" (s6(4)), "it must . . . make an order . . . requiring him to pay that amount" (s6(5)), "it must make the following four assumptions" (s10(1)).

This is in stark contrast to the confiscation legislation in the Criminal Justice Act 1988 which, when it was originally enacted, said that: "The Crown Court . . .  shall  . . .  have power . . .  to make an order under this section requiring him to pay such sum as the court thinks fit".

That confiscation legislation gave judges flexibility, which was removed subsequently when the legislation was amended.

In consequence judges find themselves making orders which many people would say are disproportionate to the offence or to any suspected other wrongdoing by the convicted defendant.

Restoring the flexibility into confiscation legislation might be a sensible way forward.

But I wonder, C_D, whether it is the confiscation legislation being reviewed or the money laundering regulations?  My view is that it is the confiscation legislation which is being used in ways that were not intended - not the money laundering regulations (which are based on an EU Directive and the work of the FATF).  I would not expect to see significant amendments made to the money laundering regulations (including the requirements for Customer Due Diligence / Know Your Client) or the obligation to report suspicions.

David

Gerard Murray's picture

The Additional Responsibilities on Auditors

Gerard Murray | | Permalink

 Previous discussions have focused on 'the average accountant and his responsibilites in reporting to SOCA. . The requirements in realation to auditors appear more detailed and flow in the first instance from International Standards on Auditing. Consider the following-

 The Auditor’s Consideration of Compliance with Laws and Regulations ISA 250 

12. As part of obtaining an understanding of the entity and its environment in accordance with ISA 315, the auditor shall obtain a general understanding of:

 

(a) The legal and regulatory framework applicable to the entity and the industry or sector in which the entity operates; and

 

(b) How the entity is complying with that framework.

 

13. The auditor shall obtain sufficient appropriate audit evidence regardingcompliance with the provisions of those laws and regulations generally recognized to have a direct effect on the determination of material amounts and disclosures in the financial statements.

 

14. The auditor shall perform the following audit procedures to help identifyinstances of non-compliance with other laws and regulations that may have a material effect on the financial statements:

davidwinch's picture

Audited accounts

davidwinch | | Permalink

Gerard

I think you have a point in relation to audited accounts and large confiscations.  For example the latest published accounts of The Weir Group Plc (interim accounts for the 26 weeks ended 2 July 2010) have a note on legal claims which includes:

"In 2004, an announcement was made to the London Stock Exchange in connection with the Group’s involvement in the UN sanctioned Oil for Food programme. The Group continues to co-operate fully with the on-going investigations by UK authorities in this connection.
. . .
To the extent not already provided for, the directors do not anticipate that the outcome of these proceedings and claims, either individually or in aggregate, will have a material adverse effect upon the Group’s financial position."

The full year's accounts to 1 January 2010 disclosed "other provisions" of £8.4m in the Balance Sheet relating to "an environmental clean up programme in the United States for a company acquired in 1992 and various other legal claims and exposures across the Group".

Clearly that figure has proved to be insufficient in the light of the recent £13.9m confiscation order and £3m fine the firm suffered in December 2010.

But I would presume that Weir Group's auditors would have been alive to this issue during recent audits (even if they may not have anticipated the size of the confiscation and fine).

David

Gerard Murray's picture

Suspicion

Gerard Murray | | Permalink

 

 

Much of the commentary has been on knowledge that an accountant or auditor may acquire that would involve a report having to be made to SOCA.. The issue of suspicion was examined by the Court of Appeal in Da Silva   

 

A reading of this case is often a timely reminder not just for accountants but for all who work in the regulated sector. At paragraph 16 Lord ~Justice Longmore stated:  

 

“It seems to us that the essential element in the word "suspect" and its affiliates, in this context, is that the defendant must think that there is a possibility, which is more than fanciful, that the relevant facts exist. A vague feeling of unease would not suffice. But the statute does not require the suspicion to be "clear" or "firmly grounded and targeted on specific facts", or based upon "reasonable grounds". To require the prosecution to satisfy such criteria as to the strength of the suspicion would, in our view, be putting a gloss on the section.”

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