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Money Laundering Regulations 2007 pose new compliance problems

15th Mar 2007
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Having come to terms with the demands of the Money Laundering Regulations (MLR) 2003, accountants need to prepare themselves for a new raft of rules that will come into force on 15 December 2007, warned David Winch of MLRO Support at an AccountingWEB seminar this week. John Stokdyk reports.

MLR 2003 required accountants and high risk businesses to appoint money laundering reporting officers and to file reports of suspicious activity they encountered during their professional work in what Winch described as a "blanket" approach.

The 2003 regulations were based on the second European directive on money laundering. Now that a third "bigger, thicker" European directive has come into force, the UK's money laundering rules are being updated, Winch explained.

The new regulations that come into force in December will be more complex, but do indicate the government is thinking more about proportionality, he said.

"The blanket has gone out the window. They now ask you to be risk aware," said Winch. "Auditors should be used to assessing risk and responding appropriately."

The risk assessment approach might reduce the overall compliance burden for firms, but there were new requirements in MLR 2007 to maintain ongoing scrutiny of transactions, to confirm the identity of existing clients at appropriate times and to put in place a training regime to ensure staff know how to deal with suspect transactions.

Some of the new rules do not affect accountancy practitioners particularly, but Winch highlighted some that would, including a need for "enhanced due diligence" when a client is not physically present and scope for "passporting" client identities, for example by relying on the ID checks of a client referred to you by the solicitor.

Having dealt with hundreds of queries about the client reporting requirements of MLR 2003, Winch said one of the main dangers accountants face was a failure of their usual procedures. While there was a high likelihood this could happen, the impact was not likely to be severe. "It's not the end of the world if you occasionally have lapses," he said.

The bigger danger came from deliberate crimes or frauds committed by clients. "My view is that every practice has at least one criminal client - maybe a retailer who sells cigarettes on which duty hasn't been paid," Winch said.

"If you're aware of it, you need to report it. If you don't the police may suspect you of being a conspirator with your client. If they think you are batting for the bad guy, then you have problems."

One of the biggest debates at the time the 2003 regulations were introduced surrounded accountants' professional privilege. Winch took the opportunity to outline the circumstances where privilege applied, commenting that it was a difficult issue that added to the compliance burden rather than providing relief.

Exemption from the requirement to report suspicions about clients are only allowed where they relate to giving legal advice or acting on behalf of someone in a legal case. As a rule of thumb, Winch suggested that when accountants offer words rather than numbers, they are entering the realms of legal advice - for example as to whether certain assets are taxable or not. However a tax appeal is not exempt from the MLR reporting requirement, unless it goes to the High Court. The advisor also has to be a member of a professional body to be claim privilege, he added.

Drawing on a number of his personal experiences, Winch provided practical examples of how to cope with the demands of the reporting process. Suggesting a policy of "shop and stop", he explained how once a report has been submitted to SOCA Serious Offences and Crimes Agency, the adviser was not required to divulge any further information until presented with a production order.

"You are not obliged to say what gave rise to your suspicions and if the police ask you, you can reply that you are bound by client confidentiality. If they give you a production order, you have to produce your working papers and documents, but it does not require you to discuss anything. Let them know that you're not one of the bad guys and that you are doing what you can to help, but that you have professional responsibilities to the client and require them to go through the legal process."

Winch's talk at the Law Society on Thursday morning dovetailed with a briefing from SWAT regional director Adrian Gibbons, who explained how the Fraud Act 2006 introduced a new set of fraud offences that advisors had to know about to comply with their responsibilities under the money laundering regulations. The new crimes included:

  • Fraudulent trading - which expands the concept in company law to sole traders and partnerships
  • Possession of, and making or supplying articles for use in fraud.
  • False representation - dishonestly misleading someone (or something, including a credit card machine) to make an illegal gain - for example presenting a card or card details to obtain goods, or sending an email purporting to be from a bank asking for credit card details.
  • Failing to disclose information - such as deliberately omitting important health or risk details on an insurance application.
  • Abuse of position - for example by people in a privileged position such trustees, professional advisers or company directors who exploit their power for personal gain.
  • Obtaining services dishonestly.

"A breach of the act is a criminal activity, so you will have a duty to consider making a report, or making a report," Gibbons warned.

He also discussed the responsibility of auditors to focus on fraud risks during their work to comply with ISA 240, specifically on the misappropriation of assets or fraudulent financial reporting.

Summarising the guidance principles, he explained, "The auditor is a watchdog, not a bloodhound. But occasionally a watchdog needs to bark. You need to be alert to the possibilities."

The reason auditors are frequently sued in the wake of fraudulent activity is because it is usually a sign of work the auditor didn't do, he explained. "If you had done the audit properly, you would have found it. If you haven't done the audit properly and failed to spot the fraud, you are not sued for not finding it, but for not following the audit standards," he said.

Gibbons encouraged the audience to engage in regular seminars to make staff aware of the circumstances where they might encounter suspicious activity and cited the example of negative sales ledger entries. The most common reason is that clients might have overpaid and sometimes to balance the accounts, the business will write the payments to some sort of "excess" account.

In one case Gibbons found an excess account containing £160,000. "Would an ordinary person regard keeping an overpayment as honest?" he asked. "In my view the act of removing an entry from a client ledger is an act of concealment and a money laundering issue," he said.

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Replies (5)

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By User deleted
16th Mar 2007 16:37

£160,000 is a lot of money - I am always surprised when I inform companies of overpayments, but they show no interest in recovering it. Last year I had the P/L clerk of a large company ring me to tell me to remove the credit from the monthly statement I sent her (and had been sending for the previous year) as she could not reconcile the account! I offered to repay the money - and got told not to - just remove it!

Or finding myself arguing with someone who insists that they have not paid the same invoice twice ! One person insisted their bank had returned the money, which is why the made the 2nd payment! They really did not want me to arrange to return the payment.

Should I be reporting these people and their companies?

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By AnonymousUser
19th Mar 2007 17:42

UNPAID watchdogs
Gibbons is paid out of the public purse. Sole practitioners providing sporadic and specific professional advice may not have the background knowledge of their client's business; may not be advising in relation to any tainted activity; will probably be denied general background information unless related to the assignment; and certainly won't be paid to collect it anyway. Gibbons was not granted delegated powers to bully, intimidate and hector ordinary professionals trying to make a living.

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David Winch
By David Winch
19th Mar 2007 16:02

Response to Frauke


Don't get this back to front!

The issue is where a supplier of goods or services receives an overpayment (or duplicate payment) and retains that money dishonestly.

Both Adrian and I stressed the importance of dishonesty in the live session. It's not just what happens - it's also why did it happen - that matters in relation to crime.

So if you should be reporting anyone, you should be reporting yourself (but only if you are acting dishonestly, which clearly you are not).


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David Winch
By David Winch
19th Mar 2007 19:43



I wonder if you are labouring under a misapprehension.

Adrian Gibbons is a regional director of SWAT.

Whilst I appreciate that SWAT stands for Special Weapons And Tactics, and for Scandinavian Workshop on Algorithm Theory, it also stands for South West Accountancy Training.

I think the name of SWAT has more to do with the latter (the firm was originally based in Devon and Cornwall, I believe). It is a private sector firm offering training and compliance services to accountancy practices (some of those services being in competition to those offered by my own firm, MLRO Support Ltd).

Unless, unknown to me, Adrian is also a secret agent for MI5, he is not paid from the public purse and he holds no official power over accountants.

Both SWAT Ltd and MLRO Support Ltd were set up by accountants with years of experience in practice to provide assistance to other accountants in practice.

However, there are dangers to accountants in practice if they are unaware of their statutory duties in relation to criminal conduct of others. Hopefully we outlined some of the danger areas at the AWEB event so that those present can take appropriate steps to minimise their risks.


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By AnonymousUser
20th Mar 2007 19:30

I did misread it.

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