Anticipating the changes ‐ Extending anti-money laundering rules
Accountants in practice are now well aware of the imminent extension to anti‐money laundering rules as set out in the Fifth Money Laundering Directive (5MLD).
But what are they and what steps should accountants now be taking to ensure that their game is sufficiently ‘upped’ in anticipation of what are sure to be much more robust procedures as HMRC continues to “relentlessly crack down on those not playing by the rules.”
Without a doubt, the first simple step to take is to make sure that a suitable client risk assessment is in place and that staff are fully trained and knowledgeable of it. But what are the other changes in the pipeline aimed at tackling the growing issue of money laundering ‐ be that high end, with criminal gangs, posing a national security threat or at a lower level.
Here we take a look at some of the changes to expect and what they will mean, day‐to‐day, for accountants and how they can future‐proof their practice to the end of December.
Setting the scene
More than £90billion is estimated to be laundered illegally through the UK financial system each year, much of it using shell companies registered at Companies House. That’s according to the all‐ party parliamentary committee scrutinising the registration of overseas entities bill.
It’s a staggering figure that’s made possible by the increasingly sophisticated methods used. In response, anti‐money laundering law must constantly evolve, and legislative updates reflect the EU’s determination to keep pace.
The most recent step towards tackling the problem was the launch of the Government consultation back in April. Draft legislation is expected to be published in October so its requirements can come into effect through UK law by 20th January next year.
The changes will greatly improve transparency and create a much more robust AML framework. Within it, UK accountants of all sizes and client bases will have a much greater role to play in helping to reduce tax fraud.
So, what changes are we to expect?
#1 Extension of obliged entities
5MLD expands the scope of obliged entities to include tax advisers and letting agents for high value transactions with a monthly rent of 10,000 Euros or more.
Art intermediaries are also to be included. Those classified as high value dealers are already regulated for AML and counter‐terrorism law purposes. However, under 5MLD, the likes of galleries and auction houses managing transactions exceeding 10,000 Euros ‐ a reduction of 5,000 Euros on the current figure ‐ will also fall within the category.
And requirements for crypto assets ‐ or virtual currencies ‐ will also be more robust under 5MLD. As will UK banking guidelines ‐ with a maximum £3000 deposit and withdrawal allowed in any one transaction.
#2 Electronic verification for customers and enhanced due diligence
Undertaking appropriate customer due diligence is vital. As is having inadequate processes in place to manage risks around Politically Exposed Persons (PEPs), despite the fact that this could lead to firms turning down work if findings aren’t satisfactory.
To ensure greater compliance, 5MLD sets out the circumstances under which ‘secure’ electronic identification and verification processes must be used when undertaking customer due diligence. Only five EU member states have this process in place at the moment but there’s now a real push towards it.
5MLD will also see scope extended from “natural persons or legal entities established in the third countries” to “business relationships or transactions involving high‐risk third countries.”
#3 More Unexplained Wealth Orders issued
A recent addition to our anti‐money laundering arsenal, Unexplained Wealth Orders (UWOs) target foreign Politically Exposed Persons or organized crime suspects, requiring them to disclose the source of their wealth if it is found to be disproportionate to their income.
Issued by a UK High Court judge upon application by an enforcement agency, accountants are now legally obliged to report any clients’ behaviour and purchases that seem anything from highly suspicious to even a tiny bit odd.
Since their introduction in January, the UK High Court has only granted a UWO against three respondents to date. The first, Mrs. Zamira Hajiyeva ‐ wife of Jahangir Hajiyev, a former banker imprisoned for fraud and embezzlement in Azerbaijan ‐ who owned 53 credit cards and managed to spend £16million in Harrods. The third against a suspected drug dealer who has had over £10 million of property frozen in his order
5MLD also has implications on how firms identify and conduct due diligence on Politically Exposed Persons (PEP) ‐ which is supported by new guidance from the FCA ‐ and which featured in the case against the accused and indeed the second UWO issued.
The High Court Judge on the case recently dismissed the challenge, finding that Mr. Hajiyev was a PEP, and that Mrs. Hajiyeva, as his wife, was also a PEP. Having repeatedly denied wrongdoing, she is appealing against the action against her and fighting against extradition to Azerbaijan in a case that will be heard later this year.
Since then, the National Crime Agency (NCA) has obtained another UWO, the third ever, to investigate £10‐million properties in London owned by a suspected drug dealer.
London property is a key area of focus for UWOs. Little wonder when Land Registry records suggest that 40,000 properties in the capital are now owned by ‘secretive’ offshore companies.
Transparency International says it has identified UK property worth a total of £4.4 billion that should be subject to UWOs, which represents an obvious high money laundering risk.
There’s a real focus on UWOs and accountants must ensure they are increasingly alert to them too, as they will be criminally liable for failing to do so ‐ being seen as criminally facilitating tax evasion.
#4 Greater emphasis on AML in conveyancing transactions
As we touched upon above, purchasing property is a favourite method of laundering money because, up until recently, normal people of ordinary wealth can conduct high value transactions without raising suspicion.
It’s made even easier by conveyancing firms dealing with a high volume of transactions often not meeting clients in person. Until now.
Accountants ‐ along with other professionals ‐ have long had a legal obligation to take reasonable steps to ensure that clients are not laundering money earned through illegal activities.
Yet under extended AML rules, it is expected that all verification checks will be undertaken electronically to deter criminals from submitting false information. Each professional involved in the purchasing process will also be responsible for undertaking their own risk assessment and checks to help eradicate the risk.
#5 Practice risk assessments must become much more robust
One of the weakest areas of AML regulation is client risk assessment process, which should be adhered to as part of the day‐to‐day running of an accountancy firm.
They’re required by law and should be the backbone of a practice’s anti‐money laundering approach, but many are still falling short and some have no risk assessment in place at all.
In preparation for the changes, accountants need to make sure that their risk assessment is up to date and that all staff are trained on its policies and procedures. Also, ensure everyone is aware of the warning signs and the reporting line of case escalation.
And with the increased emphasis placed on supervisory bodies as mentioned in the point below, if they ask for the firm’s risk assessment and it doesn’t exist, that spells trouble.
#6 Increased pressure on Professional Body Supervisors
Under 5MLD, amendments will be made so that all regulatory bodies shall publish an annual report containing information on their supervisory activity ‐ such as the number of supervisory visits and enforcement actions undertaken in the year before.
Last year, the FCA introduced the Professional Body Anti‐Money Laundering Supervision (OPBAS) to oversee professional body supervisors for AML.
In its first year of operation, OPBAS visited all 22 professional body AML supervisors to conduct initial supervisory assessments. They found that almost a quarter (23%) had no form of AML supervision in place whatsoever. One in five (18%) had not identified who they need to supervise and a staggering 90% had not fully developed a risk‐based approach and collected the data needed to understand their riskiest members and services.
Despite this, accountancy supervisory authorities ‐ such as the IFA and ICAEW ‐ now have the power to instigate criminal proceedings where offences are particularly serious, reporting members to the National Crime Agency (NCA) should the circumstances suggest suspicious activity. Any criminal conviction will also result in disciplinary proceedings by the IFA against the member concerned and a minimum penalty of £5000.
#7 Greater focus on those UK residents with offshore assets
Last year, HMRC urged UK taxpayers to come forward and declare any foreign income or profits on offshore assets before the end of September to avoid higher tax penalties. At that time, tackling offshore tax evaders in this way had generated over £2.8billion in revenue over the previous eight years, which went towards providing vital public services.
It followed the launch of ‘Requirement to Correct’ legislation that required any offshore tax liabilities − relating to UK income tax, capital gains tax, or inheritance tax ‐ to be declared to the state. But there is still some confusion as to what that entails. Under the rules, actions like renting out a property abroad, transferring income and assets from one country to another, or even renting out a UK property when living abroad could mean taxpayers face a tax bill in the UK.
And the heat is on again. HMRC has given people the chance to come clean before 1st September. After then, there’ll be increased penalties for offshore tax evasion ‐ the maximum penalty for which is 200% of the tax due, a doubling of the previous fine.
HMRC’s tougher line is supported by its ability to exchange data on financial accounts under the Common Reporting Standard (CRS) with 99 other countries. This has significantly enhanced its ability to detect offshore non‐compliance, which means HMRC has never prosecuted so many people!
#8 Coming down hard on Companies House
In response to evidence that Britain is being used by criminals across the globe to launder money, the Government recently unveiled plans for the biggest overhaul of Companies House ‐ the UK’s official register of companies and corporations ‐ in 170 years.
The UK has more than 4million registered companies and it costs just £12 and a few minutes to register a corporate entity with so few checks. It is easy to assume that, because information is registered at Companies House, it is accurate ‐ this has not necessarily been the case.
Needless to say, law enforcement bodies believe that the system is being exploited to launder billions of pounds of cash each year.
It’s a point reinforced, last year, by a campaigner who was prosecuted following a stunt to expose UK company records fraud. It was orchestrated by a Birmingham business man who decided to register government ministers ‐ including Vince Cable, then the business secretary ‐ as directors and shareholders of fictitious companies. He went on to be prosecuted, but his point was very much made.
Under proposed 5MLD changes, Companies House will gain new powers to check the identities of individuals registering and controlling companies.
They’re set out in a detailed 80‐page consultation document that will ensure that no companies are registered unless thorough checks have been undertaken. The aim is to limit the risk of fraud and misuse of information, by widening the information companies are required to disclose, increasing the checks on this information and introducing measures to improve the exchange of intelligence between Companies House, HMRC and UK law enforcement bodies.
The prevalence and severity of money laundering is clear, and some serious steps are now being taken to tackle it.
Banks have become quite good at shutting down suspect accounts, which makes life a little easier for accountants. But for those who have a client or two who seem even slightly suspicious, they’re mad to keep quiet.
Lifecycle and Steve O’Neil, along with his BTC team, support accountants to deal with a wide range of compliance matters. In December, they will deliver a live webinar to update accountants on the findings of the 5MLD consultation to be published in October. The webinar will be free for Lifecycle members to listen to. Become a member here.
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By Steve O’Neil, Managing Director of BTC ‐ trusted partner of Leonard Curtis
Business Solutions Group (LCBSG), providers of the Lifecycle network