Don’t get caught out as AML moves up the agenda

Scrutiny of Anti-Money Laundering measures is intensifying, and accountants are in the firing line for compliance failures.

The money laundering threat landscape for accountants is evolving with tougher sanctions and new economic crime legislation introduced in response to Russia’s invasion of Ukraine, and UK regulators imposing a record number of fines for money laundering failures.  

Among the new obligations for accountants to consider are new rules introduced in The Economic Crime (Transparency and Enforcement) Act 2022 that require overseas entities owning property in the UK to identify their beneficial owners. 

And the identity of company directors and people with significant control will soon need to be verified by Companies House, assuming the follow-up Economic Crime and Corporate Transparency Bill receives Royal Assent later this year.

Russian sanctions

At the same time, accountants are having to grapple with restrictions on services that firms can perform to persons connected to Russia. 

In July 2022, the government prohibited the provision of certain services, including ‘accountancy services’ and ‘management consultancy services’, to Russian companies through an amendment to the Russia (Sanctions) (EU Exit) Regulations.  

“An important matter for us currently is clients and individuals/entities connected to Russia,” Tamara Howe, director of financial crime prevention at HW Fisher, said.

“We have had to consider the services we are providing when people are connected to Russia and work out where the risks are in our client portfolios and disengage with clients where we may have been providing services to people we can no longer act for under the new restrictions placed on accountancy firms,” she said.

Significantly, the Economic Crime Act introduced a new strict liability test for financial penalties, which means there is no longer a requirement for firms to have knowledge or even a reasonable suspicion that sanctions are being breached.

The change will make it easier for the Office for Financial Sanctions Implementation to impose significant fines.

London laundromat cleaning up its act

The UK was perceived as a hub for money laundering before the war in Ukraine. London was described as a “laundromat” by Parliament’s Intelligence and Security Committee. And the National Crime Agency estimates that money laundering is in the hundreds of billions annually.  

However, it is moving up the agenda. A survey by AML software provider First AML found that 70% of accountants and lawyers are more concerned about money laundering since the war in Ukraine and sanctions began. 

The core reason is the increased focus on customer transparency and ethical client onboarding, followed by external risks such as the fallout from Ukraine, and the increased risk of fines, according to the survey.

Increased scrutiny of institutions

Indeed, financial watchdogs in the UK are cracking down on AML failings. According to data from software company Fenergo, the total number of fines issued more than tripled last year, with 14 fines issued in the UK in 2022, up from four in 2021.  

The largest fine issued by the Financial Conduct Authority (FCA) was to Santander, which was hit with a £107.8 million penalty in December after the regulator identified “serious and persistent gaps” in the anti-money laundering controls at its business banking operations. 

The FCA said Santander’s UK arm had inadequately overseen its AML systems, which hindered its ability to verify information provided by 560,000 customers about their businesses between December 2012 and October 2017.

As part of its role to protect consumers and the market, the FCA has repeatedly stepped in and penalised firms for poor management of their AML systems. For example, it has fined Standard Chartered Bank £102.2 million and HSBC Bank plc £63.9 million.

And NatWest was fined £264.8 million in 2021 following convictions for three offences of failing to comply with money laundering regulations. It was the first time the FCA has pursued criminal charges for money laundering failings.

…and accountants

Although the fines relate to financial institutions, accountants are no less in the firing line for AML compliance failures. HM Revenue & Customs said in June that it had fined 83 accountancy service providers a total of £600,000 for breaching anti-money laundering regulations between 1 July and 31 December 2022.

Overall, 240 UK businesses were named by HRMC and fined a total of £3.2 million for being in breach of the Money Laundering Regulations designed to prevent criminals from exploiting illicit cash. In addition to the named businesses, another 179 companies received smaller fines totalling more than £200,000 for rule breaches.

Xpress Money Services Ltd, a money service business based in London, was hit with a large fine of £1.4 million for failing to carry out risk assessments, not having appropriate anti-money laundering controls, and failing to conduct proper due diligence checks.

HMRC has a range of enforcement powers that it can use for businesses that do not comply with the Money Laundering Regulations, including civil penalties, criminal proceedings and removal from the register.

Martin Cheek, managing director at AML software provider SmartSearch, warned that “with the UK Government recently renewing its focus on preventing fraud and given the eye-watering fines and reputational damage which come with money-laundering breaches”, firms need to be on the lookout for criminals intent on disguising the proceeds of illegal activities as legitimate funds.

“They will often use a variety of tactics to launder money, like structuring transactions to avoid detection, using shell companies and trusts and creating false identities,” Cheek said.

The announcement comes as professional supervisory bodies are stepping up their scrutiny of accountants’ AML policies and procedures. The Office for Professional Body Anti-Money Laundering Supervision, which oversees 25 accountancy and legal professional bodies, said in April it had identified “significant weaknesses” in their oversight.

However, practitioners should still be wary of being hit with fines by their professional bodies, including AAT. The Institute of Chartered Accountants in England and Wales said in its April 2023 disciplinary update that it had reprimanded and fined a sole practitioner £14,700 for failing to provide evidence of his compliance with AML procedures.

Risk assessments  

All firms that are within the scope of The Money Laundering, Terrorist Finances and Transfer for Funds Regulations 2017 must conduct a firm-wide risk assessment, which includes taking appropriate steps to identify, assess and mitigate money laundering or terrorist financing.  

Key steps include undertaking customer due diligence, implementing internal controls, providing staff training, creating an AML manual, and monitoring and reporting suspicious activity both internally to a nominated officer and externally to the NCA.  

“Firms should conduct periodic risk assessments by taking a look at various high-risk factors like a client’s geographical location, industry, the products or services offered and so on,” Cheek said.  

Cheek also says there are three key tell-tale signs accountants should look out for when trying to prevent money laundering: 

Firms must report issues as soon as is practical in instances where a client “behaves oddly or makes uncharacteristic requests, asks you to make financial arrangements which don’t make sense commercially, or if they ask you to provide services which are outside your area of expertise” on multiple occasions.

High-risk clients 

Risk assessments must also take into account publicly available information, including the National Risk Assessment of Money Laundering and Terrorist Financing 2020 and the Accountancy AML Supervisors’ Group risk outlook published in April 2022. 

Among the clients which the AASG regarded as higher risk were those seeking anonymity or undue secrecy; new clients outside of a firm’s normal client base; politically exposed persons; cash-based businesses; high net worth individuals; and property transactions with unclear sources of funds. 

Cash-intensive businesses such as money service providers – such as currency exchanges and money-transfer services – are of particular risk as it’s much harder to track the source of cash and its movements. This makes it much easier to integrate the cash proceeds of crime into legitimate income or payments. 

Services identified as higher risk in the AASG risk outlook included trust and company formation services, or TSCPs, that can be used to enable the laundering of millions of pounds, conceal the ownership of criminal assets, and facilitate the movement of money to secrecy jurisdictions. 

What to watch out for 

“Firms need to be making sure that those services aren’t being exploited to conceal any beneficial ownership and they are not forming shell companies to facilitate money laundering,” said Donna Drew, AAT’s Professional Standards Policy Development Manager. 

Drew warns firms to guard against what she describes as the “familiarity threat”.

“You shouldn’t make assumptions about your client. Just because they have their business in the UK, or because you’ve known them for a long time, doesn’t mean they can’t still pose a risk,” Drew said. “You should always carry out a regular risk assessment of each client to determine the level of risk they pose to your firm”. 

Tamas Kadar, CEO of online fraud prevention platform SEON, said accountants need to be wary of the potential for involvement in the layering phase of money laundering – which involves the complex movement of funds through various transactions and accounts to obscure their illicit origins.  

“Fraudsters, through numerous ways, have the capability to get under an accountant’s skin and are asked to create or manipulate financial statements, falsify invoices, or engage in other deceptive practices to facilitate this process,” Kadar said.  

Additionally, accountants may face risks related to the placement phase of money laundering. This phase involves the physical placement of illicit funds into the legitimate financial system.  

“Accountants who handle client funds, such as trust accounts or escrow services, need to implement robust controls to prevent the commingling of illegal proceeds with legitimate funds,” Kadar said.

AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.