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.
Background
FATF
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.
Forty recommendations
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:
- legal systems including the scope of the criminal offence of money laundering
- measures to be taken by financial institutions and non-financial businesses and professions to prevent money laundering and terrorist financing, including:
- customer due diligence (CDD) and record-keeping
- reporting of suspicious transactions and compliance to a Financial Intelligence Unit (FIU)
- international co-operation including mutual legal assistance and extradition.
The more examinable aspects of the recommendations are referred to in the context of the UK example.
UK example
Legal systems
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:
- the Criminal Justice Act 1993
- the Terrorism Act 2000 (TA 2000)
- the Proceeds of Crime Act 2002 (effective February 2003)
- the Money Laundering Regulations 2003 - 'the 2003 Regulations' (effective March 2004).
Offences under TA 2000 and the Proceeds of Crime Act 2002 apply to all members. Offences under the 2003 Regulations apply to:
- all members in practice and/or acting as insolvency practitioners
- members in business (depending on the type of work they carry out).
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
- Failure to:
- appoint a Money Laundering Reporting Officer (MLRO)
- implement internal procedures to comply with the
legislation
- undertake CDD procedures
- make 'a suspicion report'
- comply with a direction not to proceed with a
transaction or business relationship
- maintain records in accordance with legislative
requirements.
- Obtaining, concealing or investing funds or property if knowing or suspecting that they are the proceeds of criminal conduct or terrorist funding.
- Doing or disclosing anything that might prejudice an investigation into such activities.
- Proceeding with a transaction without the consent of the relevant authority following the submission of a Suspicion Transaction Report (STR).
'Knowledge' is likely to include:
- actual knowledge
- shutting one's mind to the obvious
- deliberately refraining from making inquiries
- deliberately deterring a person from making disclosures.
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
Definition
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:
- an attempt or conspiracy or incitement to commit such an offence
- aiding, abetting, counselling or procuring the commission of such an offence
- an act which would constitute any of these offences if done in the UK.
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.)
'Criminal property'
This includes:
- proceeds of tax evasion
- a benefit obtained through bribery and corruption
- benefits obtained, or income received, through the operation of a criminal cartel
- benefits (ie saved costs) arising from a failure to comply with a regulatory requirement that is a criminal offence.
Tipping-off
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.
Fiscal offences
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
General defences
Defences to money laundering offences include:
- a report being made to NCIS or the MLRO
- that it was the intention to make a report but there was a reasonable excuse for not having done so
- acquiring or using property for adequate consideration in good faith
- 'reasonable excuse' is likely to encompass the fear of physical violence or other menaces.
Legal privilege
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:
- is received in privileged circumstances
- is not communicated to or by the lawyer with the intention of furthering a criminal purpose.
The same protection does not extend to accountants, or others who provide legal advice, who are not legally qualified.
Professional duty of confidence
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:
- there is knowledge or suspicion that a person has committed a money laundering offence
- a prohibited act will be or has been committed.
Disclosure without reasonable grounds will increase the risk of a business or an individual being sued for breach of confidentiality.
2003 Regulations
The 2003 Regulations implement FATF's recommendations on customer due diligence and record-keeping, and reporting of suspicious transactions and compliance.
Requirements
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:
- to put in place internal controls and policies to ensure continuing compliance with the legislation
- to appoint a MLRO
- to establish/enhance record keeping systems for:
- all transactions
- the verification of clients' identities
- to establish internal suspicion reporting procedures
- to educate and train all staff in the main requirements of the legislation.
Internal controls and policies
Internal controls and policies should be established and recorded in order to:
- ensure that anyone who suspects money laundering knows how to report this information to their MLRO
- provide the MLRO with the means by which the reasonableness of the suspicion can be judged, and thereby assess which suspicions should be reported to the Economic Crime Unit of the National Criminal Intelligence Service (NCIS).
Client acceptance procedures should include:
- identification procedures
- gathering 'know your client' (KYC) information, including:
- the client's expected patterns of business
- its business model
- its source of funds.
Controls over client money, and transactions passing through the client account, should pay particular attention to:
- the identity of the client
- the commercial purpose of the transaction
- the source and destination of the funds.
MLRO
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:
- receiving and assessing money laundering reports from colleagues
- making reports to the NCIS on a standard disclosure form.
The report should include the following, where known:
- suspect's full name, address, date of birth, nationality, occupation and employer
- any identification or references seen or recorded
details of transactions or activities giving rise to knowledge or suspicion
- any other information that may be relevant (eg persons associated with the suspect).
Sole practitioners with no employees or associates are exempt from MLRO requirements.
Record keeping
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.
Client identification
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.
Typical identification procedures
- For an individual - obtaining official documents, with a photograph, which establish the client's full name and permanent address (eg a driving licence or passport supported by a recent utility bill).
- For an entity - obtaining from the Registrar of Companies a certificate of incorporation, the registered address and a list of shareholders and directors.
- For a trust - ascertaining its nature and purpose, its original source of funding, and the identities of trustees and beneficiaries.
Banking and client money
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.
Politically exposed persons (PEPs)
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:
- have appropriate risk management systems to determine whether a customer is a PEP
- obtain senior management approval for establishing business relationships with PEPs
- take reasonable measures to establish the source of wealth and source of funds
- conduct enhanced ongoing monitoring of such business relationships.
Suspicion
Recognition
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:
- unusually large cash deposits
- frequent exchange of cash into other currencies
- unknown counter-party activities inconsistent with normal business activity
- off-shore business arrangements with no clear business purpose.
Reporting
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.
Educating and training all staff
Relevant individuals must be provided with training on:
- the provisions of the 2003 Regulations
- the main money laundering offences
- the business's procedures to forestall and prevent money laundering.
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:
- attending conferences, seminars and courses run by external organisations
- participation in computer-based training courses.
Tipping-off and prejudicing investigations
Tipping-off, by word or action or by a failure to speak or act is a criminal offence. Members must guard against:
- making any disclosure which may tip-off suspected money launderers that they are under investigation
- otherwise prejudicing an investigation.
What business are not required to do
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:
- does not believe that it is in its commercial interests to do so
- would be incompatible with professional or ethical requirements.
Global dimension
Ireland
Ireland has legislation on money laundering equivalent to that in the UK. It is found in:
- The Criminal Justice Act 1994, as amended
- The Disclosure of Certain Information for Taxation and Other Purposes Act 1996
- The Proceeds of Crime Act 1996
- The Criminal Assets Bureau Act 1996
- The Criminal Justice (Miscellaneous Provisions) Act 1997
- The Criminal Justice (Theft and Fraud Offences) Act 2001
- The Money Laundering Regulations 2003.
All reports of suspected money laundering are required to be directed to the Garda Bureau of Fraud Investigation, Financial Intelligence Unit.
Other territories
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.
United States
Legislation includes:
- The Bank Secrecy Act
- The Money Laundering Control Act of 1986
- The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001.
The PATRIOT Act requires all financial institutions to establish anti-money laundering programmes to include, at a minimum:
- the development of internal policies, procedures and controls
- the designation of a compliance officer
- an ongoing employee training programme
- an independent audit function.
Interaction of reporting duties
Other reporting duties
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:
- reports to regulators under Statement of Auditing Standards
- auditors' reports on financial statements (ISA 700)
- reports to those charged with governance (ISA 260)
- 'statement of circumstances' on resignation as an auditor (Section 394 Companies Act 1985)
- reports on directors' conduct (under the Company Directors Disqualification Act 1986).
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.)
'Professional clearance' letters
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:
- their satisfaction as to the identity of an entity or individual
- whether any report of suspicion has been made, or contemplated.
Anti-money laundering programme
Basic elements
The basic elements to be considered when designing an anti-money laundering programme include:
- dedicated resources
- written policies and procedures
- comprehensive coverage
- timely escalation and resolution of matters
- explicit management support
- sufficient training and education
- regular review/audit of the programme.
Dedicated resources
A person should be identified and charged with the responsibility for overseeing the entire anti-money laundering programme. The MLRO must be:
- competent and knowledgeable about money laundering
- empowered with full responsibility and authority to make and enforce policies and procedures.
Written policies and procedures, and risk factors
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:
- when an account holder wishes to:
- associate secrecy with a transaction
- route transactions via a jurisdiction or financial institution
with inadequate CDD practices (eg 'shell bank'1)
- route transactions through several jurisdictions or
financial institutions to disguise the nature, source,
ownership or control of the funds
- use accounts at a central bank or other government-
owned bank or use government accounts as the
source of funds of a transaction
- a rapid increase/decrease in the balance in an account that is not attributable to fluctuations in the underlying market value of investments held
- frequent or excessive use of funds/wire transfers, and wire transfers that do not provide information about the beneficial owner of an account or the originator of the information when such information is expected or required
- large currency or bearer instrument transactions
- repeated deposits or withdrawals just below the monitoring and reporting threshold on or around the same day
- high value deposits or withdrawals not commensurate with the type of account
- a pattern that after a deposit or wire transfer the same (or nearly the same) amount is wired to another financial institution (especially one that is offshore).
Comprehensive coverage
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:
- the account holder's identity when compared to government lists of known or suspected terrorists or terrorist organisations
- all affiliated and other relationships that may result in franchise risk.
Timely escalation and resolution of matters
Timely escalation, reporting, and resolution of these matters are crucial. Reports identifying suspicious activity should:
- be produced in a timely manner
- be subject to appropriate levels of review
- clearly identify the resolution of identified issues.
Explicit management support
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.
Sufficient training and education
This should be an integral part of any anti-money laundering programme. Relevant employees should be trained to:
- recognise possible signs of money laundering that could arise during the course of their duties
- know what to do once the risk is identified.
Regular review/audit of the programme
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.
Conclusion
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.