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Am I being Naive?

Am I being Naive?

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Hi

I have a client who exports high value goods overseas - non EU. Client is as honest as the day and I have met the agent in question. Gut feeling tells me he is honest but likes to push the margins as far as he reasonably can in the context of expanding his rather vast empire. I would personally trust the guy without question and believe he would not do anything blatently dishonest. He is a long term friend of my pretty astute client.

My client basically locates product, purchases them on behalf of his customers, invoices his customers in advance of delivery, reclaims VAT if appropriate and handles shipping/admin etc for a variable fee based on time taken/expenses etc. All fine until he came across a stumbling block. One manufacturer cottoned on to the fact client was exporting to a country where they have an agency and does not like it so are now refusing to sell that product to my client as he is being honest about the export status when trying to purchase. 

One overseas agent has found other contacts in the UK that are prepared to get the product in question from the manufacturer and export it but both the agent and the vendors want the security of my client handling funds. He would supervises the export of the goods/handle admin transactions (except VAT claim which would obviously be done by original trader) and would be paid a fairly moderate fee for his share of the work. He is comfortable with this and is anxious to keep the lines of trade open.

There are significant amounts of money involved and both the overseas agent and the UK traders are a bit wary of each other at the moment. They are wanting my client to act as a middle man for transfer of funds because the overseas agent knows he can trust my client with his money. UK dealers know they can trust my client for payment. For this reason funds would go in and out of my client's Ltd Co as a straight contra - fee invoiced and paid separately - with no invoice to back up the transactions which is where I start to worry. I am 100% certain that the payment is in respect of goods that are shipped to this agent but am concerned that HMRC would percieve this as money-laundering. I know zilch about that subject really and I could do with some other opinions.

Again I am 100% certain everything is legitimate with client and as certain as I can be that they are with the overseas agent - a wealthy man. I really do believe this is being done as a means to an end but not sure how it will be perceived by others or whether it is OK to use the Ltd Co as a vehicle to do this without my client being put in an awkward situtaion. Client will not participate in anything that is not legit and has agreed to this post as I was not confident in my own opinion. He cannot see a problem but.......... I would really value your input.

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By DBlood
24th Jun 2011 11:18

Paper trail

If funds are effectively just passing through his bank with no mark-up and no invoices then I agree it could be construed by HMRC as potential money laundering. I suspect that any investigation would come to nothing as the transaction could be shown to be legitimate, but, does he really want to risk a long and expensive investigation?

Surely a simple solution would be for the goods to be sold to him with a supporting invoice, and for him to then resell them, again with a supporting invoice. Selling goods "at cost" may not be good business, bit (so far) its not illegal.  I really think that a proper paper trail supported by a couple of invoices would be the safest way to proceed.

 

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By bernard michael bayly
24th Jun 2011 11:58

Naive??????

Don't forget that by the swapping of invoices as suggested above your client will become responsible for handling the VAT. He must beware that he isn't left holding the baby down the line and insist that all money paid to him (including his modest fee) has properly cleared before he buys/pays for the goods. I've seen this type of activity end up with major grief for the trusting client. As a matter of interest what country would the goods be exported to?

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By beverly chester
24th Jun 2011 14:45

Bernard Michael

The goods will be going to Asia. On a normal transaction the funds get into my client's account before he pays for the goods less the VAT which he obviously reclaims and we have him on monthly VAT. Refunds are processed quickly because we have made a habit of faxing invoices and export documents to HMRC. The admin fee is quite small. The problem is that he cannot afford to stand out of the VAT on these really high end goods as there could be a number of them per month and he is only in his second year of business. If the paper trail was completed as suggested, and as is obviously preferred, he woud inevitably go into liquidation due to the sheer value of the VAT he would be standing out of. As it is he stands out of around £50,000 per month on other products which is likely to treble in the not too distant future. The other potential suppliers are much bigger business's and are willing to stand out of the VAT which helps the guy in Asia to get a higher throughput. 

 

 

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David Winch
By David Winch
24th Jun 2011 16:30

A possible danger

It is possible that if your client goes ahead as proposed someone at his bank may worry that he is engaged in money laundering.  That could result in the bank making a Suspicious Activity Report (SAR) to SOCA under the Money Laundering Regulations 2007 / s330 Proceeds of Crime Act 2002 and then the bank freezing his account for anything up to several weeks.

I imagine if the money was stuck in his account and could not be accessed for that length of time the trust which others have in him would evaporate!

There have been some chunky court cases where this has happened and the customer has sued the bank for ruining his business.  It might be worth your client talking this over with his bank to see what their attitude would be.  But the banks use software to flag up suspicious transactions and he may find himself in a "Computer says, No" situation (where in effect human intervention does not over-ride the bank's procedures).

My feeling is that your client would be well advised to avoid getting into this, sorry!

David

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By rc.falconer
29th Jun 2011 11:39

Why not use irrevocable letters of credit

From memory where I have been involved with sellers that the comopany did not know we traded by irrevocable letters of credit. If these are still available from a bank they handle the money and release it when the goods are delivered

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By richardterhorst
29th Jun 2011 12:11

High risk even if a safe bet.

Despite the honesty which is not in question its the perceptions. Letting one's bank account being used for an in-out amount of same value with no documentation is almost guaranteed to have banks/HMRC and who know who else look at it from more than MLR.

I have been approached many times in the past for such schemes and always rejected them mainly because I did not know the people involved but also for the risk. Some subsequently were found out to be ML schemes (It was Africa not UK!)

I do not know whether you can actually get official sanction for it. The only way this would work if your client was properly in the supply chain with his fees as a profit and suppporting documentation inplace. My understanding is that MLR also applies to not designated persons so would also suggest some ML risk assesment is done by your client. Authorities love lots of paper so ensure it's there!

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By rc.falconer
29th Jun 2011 12:39

Irrevocable letter of credit

The point of an irrevocable letter of credit is to allow a bank to stand between the traders. The LOC wouldonly involve the traders and not intermidiary such as in the original post.

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By beverly chester
29th Jun 2011 16:16

Thanks

 I much appreciate all the advice and will pass your comments on to my client. I am sure he will be most grateful for the time and trouble you have all gone to.

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David Winch
By David Winch
30th Jun 2011 09:31

Application of the MLR

Just to clarify a point that was mentioned earlier - the Money Laundering Regulations 2007 only apply to persons operating (in the UK) within the 'regulated sector'.  The MLR contain a list of activities which fall within the 'regulated sector'.

BUT - and this is important - the principal money laundering offences are not in the MLR 2007 they are in Part 7 Proceeds of Crime Act 2002.  The principal money laundering offences (the offences which carry a maximum of 14 years imprisonment) are offences which can be committed by ANYONE in the UK.  The scope of those offences is NOT limited to persons in the 'regulated sector'.

Also included in Part 7 of PoCA 2002 is one section, s330, which IS limited to the 'regulated sector'.  That is the section which requires businesses and individuals operating in the 'regulated sector' to report suspicions of money laundering by others (i.e. clients and/or third parties).

So, for example, if a person handles money or an asset which he knows or suspects to be a benefit someone has derived from crime then that person commits a money laundering offence punishable by up to 14 years.

But (generally speaking) a person OUTSIDE the 'regulated sector' who merely suspects that SOMEONE ELSE may be committing a money laundering offence does not have to report it (in England & Wales - there are additional legal obligations in Scotland).  So, for example, someone working behind the bar in a pub (which is not an activity within the 'regulated sector') who overhears customers' conversations and as a result suspects someone of money laundering does NOT have to report it.  But if those same customers had the same conversation with their accountant in the course of getting their tax returns done then (because accountancy and tax advice ARE business activities which are within the 'regulated sector') then the accountant may be obliged to report a suspicion of money laundering by those persons.

Returning to the topic in the original question at the start of this thread.  If the accountant's client goes ahead with these deals and he suspects that actually there is something criminal going on, then the client is committing a money laundering offence.  So the client is liable to up to 14 years imprisonment.  If the accountant suspects the client is doing something which constitutes a money laundering offence then the accountant is obliged to report that (or face up to 5 years for breach of s330 PoCA 2002).

The problem for the client is that actually he may not suspect anything criminal.  But if, for some reason, the police get involved he is going to have to explain how it came about that he got involved in this rather strange arrangement and yet he did not suspect anything criminal. How would he look if it ever got into court and he was in the dock facing some time behind bars?

Does the client want to take this risk?

David

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By beverly chester
30th Jun 2011 11:09

Thank you David

Again your time in explaining this in detail is much appreciated. I think your last post really will be the deciding factor in my client opting out. He is such an honest guy that I would hate to see him end up in the situation you describe and to be honest I just don't think he would cope with it anyway, he would be absolutely terrified! He was going to have a word with the Bank as an earlier post suggested but this may well put him off.

It is such a help to be able to discuss these things on the forum and has been good to have the support that everyone has provided.

 

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