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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.

15th Feb 2021
Editor AccountingWEB
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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 This leads to unknown money being paid into the account and funds then withdrawn in cash or transferred to the person borrowing the payment facilities.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

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.

Replies (8)

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By Duggimon
16th Feb 2021 09:06

Seems an odd way round of holding the briefing. I would have thought generally that accountants would be better placed to advise the police on signs of suspicious activity indicated by anomalies in the accounting records.

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By johnjenkins
16th Feb 2021 10:05

Wow, mind blowing. The Police telling us what to look for based on real life investigations. Now let me think. What profession were the people that carried out these investigations? Could it possibly, just possibly have been the Accountancy profession? Nah we don't know what to look for, do we?
The bounce back scandal is purely down to banks not doing their job properly. How can you give a company a bounce back loan based on turnover (which the banks know) when they have just started?
I could name plenty of scams but I will only mention one. Dummy invoices, then cheque made out to whoever (not so much these days as BACS etc. is used but variations have been seen).

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By AndrewV12
16th Feb 2021 10:38

Good points well made, regrettably using the 5 red flag points made above, most small businesses tick all of the 5 boxes.

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By Ben Alligin
16th Feb 2021 11:25

The biggest money laundering racket I repeatedly come across is HMRC; but who do I report their incompetence to? HMRC persistently failing to chase clients with huge outstanding tax and VAT liabilities, so the client is engaged in tax evasion by default due to HMRC incompetence!
Simple example, take on new client on a Friday morning who urgently requires me to deal with HMRC as her bankruptcy petition is in the High Court the following Monday. Manage to get HMRC to agree to a 2 week delay during which I get PITA client up to date with all her missing accounts and tax returns. I even got her to pay HMRC all the tax/interest/penalties that she had owed them for years. HMRC not particularly grateful, neither was the client.
Next tax year, she rings me a 18:20 on 31/01 to tell me that she hopes to send me some of her accounts stuff shortly and aims to send me the rest of the stuff before midnight! She misses the filing deadline and has a hissy fit. The next day she sends me a stroppy email telling me she is dissatisfied with my services, and wants to go back to her previous accountant who she ended up in the bankruptcy courts with. Couldn't have been more delighted. Disengaged and professional clearance letter sent to previous accountants.
Yesterday I received a letter from HMRC relating to said client, advising me that she no longer (according to their records) needs to file tax returns. Their logic being that she hasn't filed a single tax return since the ones I filed for her to avoid bankruptcy. That was 5 years ago and she is still earning in excess of £120k/annum but HMRC don't seem to be able to figure that out. One quick google search would reveal to HMRC that she continues to practice her profession.

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Replying to Ben Alligin:
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By johnjenkins
16th Feb 2021 11:44

Monty Python must work for HMRC.

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Replying to johnjenkins:
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By Ben Alligin
16th Feb 2021 11:54

Blessed are the tax makers!

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By Mr J Andrews
16th Feb 2021 12:32

Oddly Time Income.
With Lockdown , the sale of a pie and a pint at my local at 7 p.m. might constitute some other criminal activity ??

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By martinhayward
16th Feb 2021 15:34

Is the failure to keep accounting records a criminal offence? Its something which can be subject to a penalty by HMRC but is it a criminal offence?

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