by Kim Smith
04 Feb 2005
This article should be studied in the context of the new learning outcomes for money laundering, published in the Paper 3.1 exam notes for examinations from June 2005. It outlines the international anti-money laundering standard and illustrates the implementation of its recommendations in the UK and globally.
The Financial Action Task Force on Money Laundering (FATF) is an inter-governmental body which sets standards, and develops and promotes policies to combat money laundering and terrorist financing.
In 1990, FATF drew up forty recommendations as an initiative to combat the misuse of financial systems to launder drug money. The recommendations have since been endorsed by more than 130 countries and are the international anti-money laundering standard against which national anti-money laundering systems are assessed. The recommendations cover:
The more examinable aspects of the recommendations are referred to in the context of the UK example.
With regard to FATF Recommendation 1, that money laundering be criminalised, money laundering has been an offence in the UK for more than a decade. Relevant legislation includes:
Offences under TA 2000 and the Proceeds of Crime Act 2002 apply to all members. Offences under the 2003 Regulations apply to:
Accountants working wholly or mainly outside the UK must pay heed to the UK legislation which applies to any professional work carried out in the UK (including limited assignments and occasional client meetings).
Principal offences
'Knowledge' is likely to include:
Suspicion is not defined in existing legislation. However, case law and other sources indicate that it is more than speculation but it falls short of proof or knowledge. Offences may be tried in a Magistrate's Court or in a Crown Court. On conviction, offences are punishable by imprisonment, a fine or both.
All partners within a practice (and directors in a firm) are potentially liable on a joint and several basis for breaches of the firm's obligations. All individuals are liable in respect of breaches of their individual obligations.
Money laundering is the process by which criminals attempt to conceal the true origin and ownership of the proceeds of their criminal activity, allowing them to maintain control over the proceeds and, ultimately, providing a legitimate cover for their sources of income.
The term is widely defined to include: possessing, in any way dealing with, or concealing, the proceeds of any crime ('criminal property'). It also includes:
Further, it includes failure by an individual in the regulated sector to inform the National Criminal Intelligence Service (NCIS) or MLRO, as soon as practicable, of knowledge or suspicion that another person is engaged in money laundering.
(The NCIS is an example of a FIU that serves as a national centre for receiving (and, as permitted, requesting), analysing and disseminating STRs.)
This includes:
The offence of tipping-off occurs when the MLRO (or an individual) makes a disclosure which is likely to prejudice an investigation. This does not prevent businesses and individuals discussing with clients, and advising on, issues regarding prevention of money laundering or other related matters, on a non-specific basis.
Tax-related offences are not in a special category. Tax evasion is a crime, the proceeds of which can be laundered in the same way as those from drug trafficking, terrorist activity, theft, etc. Offences may relate to direct or indirect tax. Tax evasion offences, which fall within the definition of money laundering include underdeclaring income and overclaiming expenses.
An action carried out abroad is relevant if it would have been an offence had it taken place in the UK. However, innocent errors which constitute criminal offences do not need to be reported.
Defences to money laundering offences include:
Legal privilege may provide a defence for a professional legal adviser to a charge of failing to report suspicions of money laundering. It only applies where information:
The same protection does not extend to accountants, or others who provide legal advice, who are not legally qualified.
Accounting professionals will not be in breach of any professional duty of confidence if they report, in good faith, any money laundering knowledge or suspicions to the appropriate authority.
Statutory provisions give protection against criminal action for members in respect of their confidentiality requirements. This protection applies even if the suspicions later prove to be groundless, provided that the reports were originally made in good faith.
Client confidentiality override provisions are available when:
Disclosure without reasonable grounds will increase the risk of a business or an individual being sued for breach of confidentiality.
The 2003 Regulations implement FATF's recommendations on customer due diligence and record-keeping, and reporting of suspicious transactions and compliance.
It is an offence not to comply with the following obligations, designed to assist members in detecting and preventing their organisations being used for money laundering purposes. These obligations are:
Internal controls and policies should be established and recorded in order to:
Client acceptance procedures should include:
Controls over client money, and transactions passing through the client account, should pay particular attention to:
The MLRO should have a suitable level of seniority and experience. Alternative arrangements must be made whenever the MLRO is unavailable for a period of time. The MLRO is responsible for:
The report should include the following, where known:
Sole practitioners with no employees or associates are exempt from MLRO requirements.
All client identification records, together with a full audit trail of all transactions, must be maintained. Records of transactions must be kept in a readily retrievable form for a period of at least five years, with controls to ensure that they are not inadvertently destroyed.
Client verification records must be retained throughout the period of the relationship and for five years after termination of the relationship. ACCA's Rules of Professional Conduct 'Retention of books, files, working papers and other documents' also apply.
The requirement to verify the identities of all clients is mandatory. Verification must be documented before any work is undertaken. Sufficient knowledge of a client must be maintained to be able to identify that which is unusual and/or suspicious. Members are required to obtain evidence of identity for all clients where:
an ongoing business relationship is to be established
the total value of any transactions is not known at the outset
a one-off transaction or a series of transactions in excess of (the equivalent of) Euro 15,000 is to be undertaken.
The 'Charter for the European Professional Associations in support of the fight against organised crime' (1999) requires practising firms to verify client identity when handling client money.
Services that involve handling clients' money may be considered to represent a higher than normal risk and so require a higher level of KYC and identification procedures. Handling a client's money may also give rise to constructive trust issues.
PEPs are individuals who are, or have been, entrusted with prominent public functions in a foreign country (eg Heads of State and senior politicians and officials). Business relationships with family members or close associates of PEPs involve reputational risks similar to those with PEPs themselves. In addition to performing normal due diligence measures, financial institutions should:
It is impossible to define suspicion. A suspicious transaction or situation will often be one which is inconsistent with the client's known legitimate business or personal activities. Examples of potentially suspicious transactions can include:
Members are legally required to report knowledge or suspicions of money laundering to the appropriate authority (ie their MLRO, police or customs officer).
It is a criminal offence not to do so. There are no de minimis concessions. The obligation to report is irrespective of the amount involved or the seriousness of the offence. NCIS has designed standard disclosure forms for full and abbreviated disclosures.
If a client asks that an action be taken that would be a money laundering offence, a written request for consent must be made to NCIS. If no response is received within seven working days, NCIS is deemed to have provided the consent requested, and the client is entitled to proceed.
Relevant individuals must be provided with training on:
Training should enable businesses to establish a culture of complying with money laundering requirements. The provision of training should be documented to demonstrate compliance. It does not need to be performed in-house. Effective methods of training may include:
Tipping-off, by word or action or by a failure to speak or act is a criminal offence. Members must guard against:
Businesses are not required to carry out any additional procedures to seek out money laundering, but only to be in a position to recognise and report potential money laundering encountered in the course of their normal work. Investigations into possible money laundering should be left to law enforcement agencies.
There is no automatic need to cease working for a particular client where a report has been filed. However, a business is not obliged to continue to act for a client where it:
Ireland has legislation on money laundering equivalent to that in the UK. It is found in:
All reports of suspected money laundering are required to be directed to the Garda Bureau of Fraud Investigation, Financial Intelligence Unit.
Money laundering is a global activity that affects all territories in varying degrees. The UK legislation applies to businesses operating in the UK including those working from a UK office for a client who is based abroad.
The UK legislation defines money laundering as including proceeds of an act which takes place abroad but which would have been an offence if it had taken place in the UK.
A number of territories have legislation equivalent to the UK (eg Australia, Singapore and US). Businesses are not obliged under UK legislation to acquaint themselves with money laundering legislation in other countries.
Legislation includes:
The PATRIOT Act requires all financial institutions to establish anti-money laundering programmes to include, at a minimum:
Accounting firms (and others) may have other reporting duties to fulfil, after reporting suspicion to NCIS, to which different reporting standards may apply. For example:
In some cases, it will not be necessary to refer to the substance of the matter reported to NCIS in other reports. (Consider, for example, that an auditors' report refers only to material matters, whereas there is no de minimis limit for reporting matters to NCIS.)
If suspicion has been (or may be) reported, businesses and individuals need to be cautious in responding to 'professional clearance' letters. It is recommended that businesses and individuals do not respond to questions in professional clearance letters concerning:
The basic elements to be considered when designing an anti-money laundering programme include:
A person should be identified and charged with the responsibility for overseeing the entire anti-money laundering programme. The MLRO must be:
Written, reviewed and approved policies and procedures are the foundation of any programme. Procedures should use technology where available and identify risk factors, the presence of which may suggest money laundering activity. Risk factors include:
All aspects of a company's business, particularly those that have contact with customers should be covered. KYC guidelines are crucial and, at a minimum, should include an examination of:
Timely escalation, reporting, and resolution of these matters are crucial. Reports identifying suspicious activity should:
Management, at the most senior level, should set the 'tone at the top' by demonstrating explicit support for the firm's anti-money laundering efforts. This support needs to be clearly articulated to all employees.
This should be an integral part of any anti-money laundering programme. Relevant employees should be trained to:
A regular review of the programme should be undertaken to ensure that it is functioning as designed. Such a review could be performed by external or internal resources, and should be accompanied by a formal assessment or written report.
This article is an abbreviated version of a more comprehensive article that can be found at accaglobal.com/students. This is a vast subject and candidates are also recommended to read the examinable document: ACCA's Technical Factsheet 94: 'Anti-money Laundering (Proceeds of Crime and Terrorism) Second Interim Guidance for Accountants, published in February 2004.
1.A bank incorporated in a jurisdiction in which it has no physical presence and which is unaffiliated with a regulated financial group.