AML: How to spot crime in clients' records
Accountants and tax advisers have been warned of five crime indicators when looking at client’s accounting records.
At a Metropolitan Police briefing accountants were advised to look out for red flags such as clients with a lack of sales records or income being received at odd times of the day.
The Metropolitan Police used practical real life examples from recent investigations and court cases to illustrate the money laundering threat to the profession.
The briefing comes as the National Risk Assessment of money laundering and terrorist financing scored accountancy services as high risk for money laundering.
Covid-19 has also put even more strain on money laundering risk as criminals have preyed on struggling or failing businesses and have exploited government support such as Bounce Back Loans.
The CIOT, who attended the briefing, reminded its members to report any suspicion of money laundering to their firm’s MLRO so they can decide whether a report should be made.
Here are the five indicators of criminal activity at a client’s business that the Metropolitan Police highlighted at the briefing.
Lack of sales records
A recurrent feature of money laundering investigations is when a business has no sales records and asks their accountant to calculate income based on the funds received or deposited in their bank account.
Another red flag linked to this is when a client provides an annual or monthly totals without any supporting documentation. It was also pointed out that failing to keep accounting records is a criminal offence.
Oddly time income
Alarm bells should sound if a client’s card statements show payments between midnight and 6am, and they’re not part of the night-time economy. Again, this could be a sign of money laundering.
An example of this is where the client’s business card processing machine or account was ‘lent’ to another business. This leads to unknown money being paid into the account and funds then withdrawn in cash or transferred to the person borrowing the payment facilities.
Lack of assets or supplies
When there is a lack of assets to carry out the core activity of the business, this is an indicator that the company is a front for criminality. The Metropolitan Police used the example of a car hire firm with no cars in the company accounts to highlight the risk of false accounting.
Low staff costs
If your client has a lack of staff costs but a has a turnover higher than what the owner could generate themselves, the business may be involved in modern slavery or human trafficking.
An example involved a case (R v Lupa) where 20 victims were forced to work on builder sites and as hotel cleaners, while living in squalor in a shared room.
As seen in the example, the operator may spread payments from different companies such as companies and a sole trader. However, the business may not have opened a separate bank account. In the R v Lupa example, the bank statements showed income from multiple construction firms for the same periods. It’s worth investigating whether all the costs processed through the business are relevant.
Loans have acted as a lifeline for many cash-strapped businesses struggling through the pandemic. But clients may have also turned to non-banking sources, such as loan sharks.
Where a loan is owed to your client but there is no evidence that the loans were paid out, this is an indicator of extortion.
These loans could have been secured on the residential properties of their ‘customers’ with an interest rate in excess of 100%. Another indicator is if your client acquired property for significantly less than the market price when the ‘customer’ defaults on the loan or struggles to make repayments.