Accountants warned on new money laundering risks
Julia Penny explains why accountants should pay close attention to the National Risk Assessment of money laundering and terrorist financing.
On 17 December 2020 the government issued its National Risk Assessment (NRA) of money laundering and terrorist financing. All those affected by money laundering regulations should pay attention to the NRA, as the risks it identifies must be considered in formulating anti-money laundering policies and procedures.
As you might expect for a country-wide risk assessment the document is rather long, at 152 pages including the glossary. However, it is helpfully set out in sections, including one related to accountancy service providers.
The report highlights the damage caused by serious and organised crime, which costs the UK economy £37bn each year. In 2018/19 the cost of payment card, cheque and remote banking fraud was £853.1m, an 11% increase on the previous year.
Tax evasion cost a further £4.6bn, with £4.5bn lost through smuggling and other tax related criminal attacks. There were 3.8m incidents of fraud in 2019/20 – with the risks very likely to have worsened with the increase in remote working since then.
Based on the UN estimate that 2-5% of global GDP is laundered, the level of money laundered within the UK potentially runs to hundreds of billions annually. No accountant can ignore the issue, as any practitioner who thinks their client base is free of any fraud is likely to be mistaken.
Key risk areas
To help understand what is happening and how to counter the risks, the current NRA highlighted some of the changes that have taken place the last report was issued in 2017, while also noting risks that have stayed the same.
- Traditional high-risk areas remain: financial services, money service businesses and cash
- Increased use of financial technology companies and cryptoassets (eg Bitcoin or similar), though this is still at a low level overall
- Professional services remain attractive to money launderers, posing high risks to the accountancy sector.
UK’s AML record
Since the 2017 NRA the Financial Action Task Force (FATF) – a global body set up to monitor and improve regulation and mitigation of financial crime – has given the UK the best rating of any country so far in the current round of evaluations.
This country has a strong understanding of money laundering and terrorist financing risks and a good record at prosecuting illegal finance and confiscating illicit proceeds. However, the UK regime continues to exhibit weaknesses in relation to a number of the organisations with responsibilities in this area. The entities involved include the FCA, HMRC, Professional Body Supervisors, the UK FIU (Financial Intelligence Unit) and the Suspicious Activity Reports (SARs) regime along with Companies House, which has its own issues with the accuracy of data held on the company register.
Risks for accountants
The risk areas most likely to affect accountancy firms point the spotlight on anti-money laundering (AML) policies, procedures and training.
First, it remains the case that company formation and related professional services are key enablers for money launderers and what is termed trade-based money laundering (TBML), where businesses are used to hide the criminal origins of funds. This is clearly an area where an accountant’s clients may be active. Products and services used in TBML have included cars, clothing, construction, gold, and since Covid-19 emerged, pharma, textiles and personal protective equipment.
Exploiting Covid-19 opportunities
Covid-19 has also given rise to other money laundering risks. For example, criminals may exploit struggling or failing businesses by investing illicit funds in them or buying assets in distressed sales. Legitimate businesses may be vulnerable to approaches from organised crime to allow their companies to be used as a front for money laundering activities, especially if finances are tight.
Or businesses may claim for government grants or loans to which they are not entitled and, in some cases, companies have specifically been set up to claim Covid-19 grants. At the moment Companies House cannot stop a suspect company being set up, but reforms will soon mitigate these risks.
In the meantime, if an accountant is aware of such instances, they can raise alarm bells with an SAR, which might put a stop to the fraudulent activity. In response to these new risks, the NCA added three new SAR glossary codes to identify suspicious Covid-19 activities on the form.
Moving on from Covid-19 risks, cash-intensive businesses continue to be used to launder money. Such businesses include beauty parlours, newsagents, restaurants, takeaways and car washes. Sometimes these businesses also engage in, or are linked with, modern slavery and human trafficking, so accountants must be particularly careful to ensure there are no indications that clients who operate in these sectors are criminals, or that such businesses are being used by criminals to launder money.
Trust and company service providers (TCSPs) are judged as high risk they companies and limited partnerships they set up can be used to facilitate money laundering. TCSPs that provide nominee shareholders and directors can also be high-risk, particularly where the directors have no understanding of the underlying business or oversight of its operations, or where they are the director of 20 or more companies.
Accountancy firms are often also TCSPs and must identify as such with their regulator. Make sure that your firm-wide risk assessment properly identifies the nature and extent of the risks from these types of services and that you have in place appropriate mitigating policies and procedures.
Vulnerable corporate structures
The risk of money laundering through corporate structures remains high. After details of persons of significant influence (PSCs) started to be required for Scottish Limited Partnerships (SLPs) the number of registrations of such entities dropped from 4,932 in 2017/17 to 2,689 in 2017/18 and again to just 657 in 2019/20.
Some of this decline was offset by a rise in English and Northern Ireland Limited Partnerships, but this did not match the drop in SLP registrations.
Talking about PSC details, hopefully you remember that the 5th Money Laundering Directive (5MLD) brought in the requirement for regulated firms to report to Companies House where a discrepancy was identified between the information held on the PSC register and the information gathered as part of client due diligence (CDD).
Guidance is provided on how to report a beneficial owner discrepancy via GOV.UK. As of August 2020, 3,000 reports had been submitted, suggesting that this change is likely to have a big impact on the accuracy of information held by Companies House.
Newly regulated sectors
Art market participants became newly regulated in January 2020 for money laundering purposes as a result of 5MLD, along with a number of other sectors. Art dealers are judged to be at high risk as the beneficial owners and the final destination of art purchases can be concealed. The sums involved and international nature of the market also make it attractive for money launderers.
Accountants with clients who are art market participants or indeed high value dealers (who have been regulated for some time) should bear in mind the increased risk of this type of entity when determining their procedures for CDD and subsequent monitoring.
While still rare, some accountancy service providers are increasingly being asked to accept payment in cryptoassets. This mechanism doesn’t necessarily raise suspicions, but does make it easier to hide the origin of funds compared with other payment methods.
Overall the risk score for accountancy service providers remains high for money laundering and low for terrorist financing. The risks are highest when accountants fail to understand their AML obligations or do not implement appropriate risk-based controls or accountancy-specific AML training.
Professional body supervisors are being pressured by OPBAS to up their game, which might explain why the number of fines issued to accountancy firms in 2018-19 almost doubled to 226 compared to 126 in the previous period.
Money laundering is an international issue though and IFAC, in collaboration with ICAEW, is issuing a series of fact sheets about common money laundering risk areas that are worth sharing with staff and partners.
More important than avoiding fines, perhaps, is the role accountants can play in helping to limit organised crime, tax evaders, fraudsters and other criminals. So, to play your part make sure you understand the rules. Make sure you really think about the risks and put in place appropriate procedures to mitigate them. Keep all of your staff and partners up to date and alert to the risks.
As an added bonus, these steps will also help you to avoid fines.
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Julia Penny is the principal of JS Penny Ltd which provides technical and training consulting on anti-money laundering procedures, auditing and financial reporting. Julia is a member of ICAEW Board and Council, chair of the ICAEW Ethics Advisory Committee and past chair of the ICAEW...