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AML scrutiny tightens as new regulations take effect

Although the UK is set to leave the EU at the end of the month, that doesn’t stop the EU’s fifth money laundering directive from coming into force today.

10th Jan 2020
Practice Editor AccountingWEB
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Not only have accountants got to contend with the annual self assessment headache, but with the new money laundering regulations, they will have to also tighten their AML compliance.

The new money laundering regulations were transposed into national law on 10 January after the Treasury issued an 88-page consultation back in April 2019, which garnered over 200 responses.

The new amendments clamp down on cryptocurrencies, increase due diligence for individuals and businesses in high-risk countries and has stricter conditions for e-money and pre-paid cards.

Although the outcome of the consultation has not yet been published, the UK remains an EU member state and so its obligations under the fifth money laundering directive will apply.

The new regulations have seemingly sneaked up on some accountants, with one 2019 survey flagging that 61% were not even aware of the changes. But firms that fail to comply with the new regulations could face a significant fine.

The fifth directive amends the 2017 regulations. David Winch, a director at Bartfields Forensic Accountants, points out that this makes it more difficult to absorb the content as opposed to repealing the 2017 Regs and issuing a completely new set of 2019 ones. 

“It’s understandable that the government did this, but a bit of a nuisance for users such as accountants,” Winch told AccountingWEB. “No doubt some accountants are still catching up with some of the 2017 changes, such as the firm-wide risk assessment under reg 18.”

Electronic ID checks and due diligence

Enhanced due diligence plays a major role in the 5MLD, and the regulations also include a push towards Electronic ID checking as opposed to asking to see documents like passports.

David Winch wondered whether accountancy supervisory bodies and HMRC will lean on accountants and tax advisers to adopt electronic ID.

“For comparison, we have seen the supervisory bodies progressively leaning more on accountants to produce evidence of criminal records checks of firms’ owners and managers.”

Among the changes to broaden the circumstances in which enhanced due diligence (EDD) is required, Winch says a new detail to watch out for concerns the requirement to obtain “information on the source of funds and source of wealth of the customer and of the customer’s beneficial owner”.

“Previously EDD has appeared to be concerned primarily with obtaining extra confirmation of the ID of the customer – but the real money laundering issue has to be about the source of the customer’s funds, not just their ID. This is now more recognised in the regulations,” said Winch.

Elsewhere, there is also a new responsibility to report discrepancies in registers under Reg 30A. But Winch expects in practice accountants will “pragmatically just say to their clients ‘we need to get the correct information on the register’ and get it sorted that way, rather than reporting a discrepancy to the Registrar”.

Crypto-clampdown

Another significant change is the clampdown on virtual currency, which up until now has been unexplored territory for regulators. This means cryptocurrencies will come into scope for the first time.

FA Simms and Partners Richard Simms highlighted the need to regulate crypto assets when he summarised the consultation, noting that “they’re online, their ownership is often unclear and have no set territories, and evidence suggests that they can be part of illicit activities”.

 “Similarly, e-money and pre-paid cards are now more tightly regulated.

Trust registration service

One element that won’t immediately come into force with the rest of 5MLD is the trust registration service. This should come as a relief for agents and professional bodies like the CIOT, which has voiced concern that the scope of the existing trust register would have been significantly extended due to the directive.

HMRC confirmed to the CIOT and ATT that the trust registration elements will be part of a more detailed technical consultation regarding the implementation in early 2020. “Trust Registration Services must contain a robust and proportionate framework, and this consultation will include additional information on the proposals for the type of express trusts that will be required to register, data collection and sharing, and penalties,” noted HMRC. 

HMRC’s response demonstrates that 5MLD is not the end of the road and further regulatory updates will surely be in the pipeline throughout this year.

Leave no stone unturned

The 5MLD directive is the latest in the government's effort to tighten scrutiny on AML compliance and respond to money laundering costing the UK an estimated £37bn each year.

As part of this, the past year has seen the launch of the Office for Professional Body Anti Money Laundering Supervision (OPBAS). The supervisory body made waves back in April 2019 by criticising accountancy bodies for a lack of enforcement action and prioritising subscription numbers over supervision.

HMRC’s “more robust approach to supervision” also means that its AML fees increased by 230% in order to recruit a greater number of staff to tackle non-compliance. However, yesterday HMRC reversed its decision to hike estate agents' AML registration fee 24 hours before these new regulations became a legal requirement.  

Michael Harris, director of financial crime compliance and reputational risk at LexisNexis welcomed the greater controls but warned organisations to take all necessary precautions to become compliant ahead of the deadline.

“Failure to comply will have wide-reaching ramifications, both for organisations and society, so firms must leave no stone unturned when it comes to meeting the obligations of 5MLD.”

Replies (30)

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By mkowl
10th Jan 2020 11:06

New year same old [***] we have to deal with

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By ireallyshouldknowthisbut
10th Jan 2020 11:11

Well the money laundering might be costing billions a year, but does checking client ID of your make one ounce of difference to it?

Spending vast sums of money on complying with every more complex rules which don't stop the thing you are trying to tackle is rather futile.

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By Ian McTernan CTA
10th Jan 2020 11:23

So not only do we ahve to do all this mainly unpaid work but we then have to pay someone to stand over us and have the possibility of huge fines if we fail to comply with the waste of time regulations...

Has there been a study of the amount this all costs compared to how much it saves?

I'd rather they took all this money that's being spent on this and used it to pay for more detectives to investigate money laundering directly.

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Replying to Ian McTernan CTA:
By Nick Graves
10th Jan 2020 11:28

Perfect reason to drive all of the legitimate users of Crypto underground, in order to avoid the hassle.

Yeah, another great idea from the Useless Idiocracy...

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Replying to Ian McTernan CTA:
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By Balancing
13th Jan 2020 07:38

Hi Ian

Police and Crime Commissioner Anthony Stansfeld states that a quarter of the fraud figure could be reduced by jailing just two bankers. He is currently trying to address the matter of global financial corruption and collusion in Parliament as he comments on the measley sums being put to tackle fraud. See his testimony on ITNJ https://www.youtube.com/watch?v=XRS-pum5ovA

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By dmmarler
10th Jan 2020 11:28

All electronic ID checking means is a higher accountancy fee for the client. It would be a nonsense for most small business owners.

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By johnjenkins
10th Jan 2020 11:32

"Due diligence". A bit vague to start with. I would say most Accountants apply due diligence (we call it "common sense") in all their business dealings. Financial Institutions and solicitors are the kiddies that can't seem to get their heads around "common sense". I was actually asked by a solicitor (under due diligence) if I was the Sir John Jenkins, middle Eastern diplomat. Funnily enough he didn't ask me if I was the John Jenkins, the car dealer in our area.

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By JDBENJAMIN
10th Jan 2020 11:44

Has anyone on this forum ever had an instance of a client using a false ID? That is the thing which MLRO seems obsessed with, but I have personally not seen a single case of it in 34 years of accountancy work. Think of all the time spent on ID checks by accountants on a problem that barely exists.

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Replying to JDBENJAMIN:
By Husbandofstinky
10th Jan 2020 11:59

Would we as mere minions know the difference between a real one and a properly prepared bought and paid for, high end fake one? I bet your average 'due diligent' person wouldn't be able to tell the difference.

Roll on retirement.....

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Replying to Husbandofstinky:
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By 0705736
10th Jan 2020 14:49

I'm pretty sure we wouldn't know the difference. However having a requirement to provide ID must act as a first line of defence against small-time criminals or would-be criminals who would otherwise be free to take on any identity they chose.
We should remember that the purpose of AML is to at least try to cut down the amount of financial crime and criminal activity generally, as that can only lead to a fairer society and a move away from a situation where organised crime gets out of control.
I'm no longer in practice on my own account and have little involvement with AML now, but it's always been clear to me that we should applaud all efforts to reduce crime.

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Replying to 0705736:
By ireallyshouldknowthisbut
10th Jan 2020 15:38

Id "applaud the effort to reduce crime" if it was actually doing that.

The farcical ID checking does diddly squat.

What cuts down crime is fraud officers investigating and prosecuting frauds.

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Replying to ireallyshouldknowthisbut:
By Red Leader
11th Jan 2020 14:13

Whilst generally agreeing with the sentiments on this thread, I don't think officers investigating crime would help much compared to AML checks. Efforts at prevention might though, forcing ID checks is one way to make it more difficult to commit the crime in the first place/ drive up the costs for the criminal.

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Replying to Red Leader:
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By johnjenkins
13th Jan 2020 09:04

"Driving up the costs for the criminal" Am I reading this right???????????????????

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Replying to 0705736:
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By Ian McTernan CTA
13th Jan 2020 11:06

It's clear you have little to do with it these days by the tone of your response. If you had to deal with it and realise what we're doing has zero effect at great cost you might sing a different tune.

I'd applaud an effort to reduce crime. All this AML effort, time and expense could be much better spent on a few thousand more police detectives who would be much more effective at routing out criminals.

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By tedbuck
10th Jan 2020 11:55

Like the ICO letters to property companies demanding £40 for nothing this is just another oblique means of taxation and keeping people employed in worthless jobs.

I cannot remember any report to the NCA etc. ever producing any response at all so it really is a huge waste of time and money.

Idiocracy just about sums it up.

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By Marlinman
10th Jan 2020 12:38

How about the govt paying us to do their dirty work?

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By pauljohnston
10th Jan 2020 13:17

@marlinman. I did suggest this be paid out of the proceeds that are collected from criminals but it fell on deaf ears. No doubt the treasury wants to spend it on its next daft idea

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Replying to pauljohnston:
David Winch
By David Winch
13th Jan 2020 09:45

It certainly used to be the case that 50% of recovered monies went to HM Treasury, and the other 50% was split between prosecutors, investigators and courts. (Nothing for accountants, sorry!) Whether that is still the case I don't know.
David

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By fellowcraft
11th Jan 2020 12:08

Is there any specific guidance about what exactly we need to do? We already ID beneficial owners, ID online, have no trusts or crypto asset customers. I'm a bit confused about exactly how I'm supposed to change my systems/procedures

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Replying to fellowcraft:
By Red Leader
11th Jan 2020 14:14

Ah ha! Prepare to be prosecuted then! Crazy.

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Replying to fellowcraft:
David Winch
By David Winch
11th Jan 2020 14:29

If you are satisfied that Enhanced Due Diligence is NOT required (see Reg 33 of 2017 Regs as amended by Reg5(4) of 2019 Regs), then I would suggest a careful reading of Reg 28 of MLR 2017
http://www.legislation.gov.uk/uksi/2017/692/regulation/28/made
and the amendments to it by Reg 5(2) of ML(Amendment)Regs 2019
http://www.legislation.gov.uk/uksi/2019/1511/regulation/5/made
and the new requirement under Reg5(3) of the 2019 Regs (inserting Reg 30A into the 2017 Regs).
David

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By Balancing
13th Jan 2020 07:31

Tell ICAEW re money laundering compliance, because in my experience they dont give two hoots.

Also what is the point in checking Companies House if Companies House dont make checks themselves?

In addition, all this hiding of information on Companies House, with the claim it is to protect the Companies, it could actually be protecting white collar crime. Transparency should be increased, not reduced.

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Replying to Balancing:
David Winch
By David Winch
13th Jan 2020 09:51

The MLR supervisory work done by the professional bodies is now itself supervised by a separate body, OPBAS - the Office for Professional Body Anti-Money Laundering Supervision.
As for checking Companies House records which Companies House themselves do NOT check - is that perhaps the point?
David

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Replying to davidwinch:
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By Roland195
13th Jan 2020 10:02

Is that not the point being made though? Surely it would be far more effective to have Companies House make checks on directors/shareholders perhaps even using the same verify system used by .gov.

Any cost in doing so could easily be re-charged onto the £12 fee currently levied which may also then go some way to discouraging disposal Ltd Cos.

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Replying to Roland195:
David Winch
By David Winch
13th Jan 2020 11:26

I think it would be fair to point out that if, hypothetically, my next door neighbour wished to engage in financial crime she could incorporate a company through Companies House and use it for nefarious purposes without involving any professional adviser. So having professional advisers check their clients' particulars would not prevent that.
David

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Replying to davidwinch:
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By johnjenkins
14th Jan 2020 09:44

Yes you could buy any number of companies. Use one for crime while the others are dormant and so on. As long as you do it for a year or so, no problems. You could tell the bank anything that involves a cash based business. If you didn't get too greedy you could go on ad infinitum.

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By Balancing
13th Jan 2020 07:52

Please write to your MP's and ask them to support Anthony Stansfeld's actions in improving police levels to tackle fraud. Here is his testimony on his experience of financial and judicial corruption. He is speaking to parliament at the moment, so our MP's support will be helpful. https://www.youtube.com/watch?v=XRS-pum5ovA

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Replying to Balancing:
David Winch
By David Winch
13th Jan 2020 10:35

It is true to say that police resources are very limited and that violent crimes, sex crimes & drug crimes are more in the public eye (and investigation of them more appropriately funded) than fraud & financial crimes.
Also the investigation of financial crime requires police officers with skills & experience - developing which involve spending money and time.
But don't forget that it is not only the police investigation that needs funding. The CPS and courts need funding and - if there is to be a fair trial - the defence also needs funding.
That means Legal Aid - as many persons accused of financial crimes will have their own funds frozen. The law expressly does NOT permit a person's frozen funds to be used to pay his defence costs (s41(4) PoCA 2002).
Government funding for the Ministry of Justice has been cut by about 40% over the last 10 years or so.
Legal Aid rates for expert witnesses (such as myself) were cut by 20% in 2013 and have not changed since then.
All of these issues need to be addressed if fraud and financial crime are to be tackled sensibly.
(I'll get off my soapbox now!)
David

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By johnjenkins
13th Jan 2020 09:09

Great isn't it. We can send people to Mars. We can make someone walk again with brain technology, etc. etc. Yet we can't stop someone sitting on a beach somewhere with a laptop money laundering thousands if not millions of £'s. Priceless.

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By pauljohnston
18th Jan 2020 10:45

Interesting points and as usual the best comes from David Wynch - politicians take note.

Part of the problem as I see it is that practioners are monitored ny desk jockeys who never have been a practioner. In my view this means that they are looking at the problem from a different angle. To help us all be better at it and help provent money laundering activity we need practioners to help us.

I have just endeavoured to submit a SAR. This process needs to be more user friendly and work properly. Like many readers I submit few SARs so it is a process that I have to relearn each time. It would also be helpful if when one clicks the save button that it worked.

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