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Economic Crime Act: how to increase due diligence in your firm

The fast-tracked Economic Crime (Transparency and Enforcement) Act rushed through parliament earlier in the year, coming into effect on 15 March. Although the Act has been in the making for several years, the Russian invasion of Ukraine and the resulting economic sanctions created a new sense of urgency.

The Act is designed to crack down on economic crime and sanctions evasion by improving transparency and making it easier to trace sources of unexplained wealth (including money laundering) and the individuals involved.

In essence, the Act includes:

  • Introduction of Register of Overseas Entities. This is applied retrospectively to any UK land held by non-UK entities owned since 1 January 1999 (England and Wales) and 8 December 2014 (Scotland), the register requires any overseas or non-UK entity with ‘relevant’ interest in UK land to disclose beneficial owners and register with Companies House. 
  • Extension of the pre-existing 2017 Unexplained Wealth Order (UWO) regime to provide intelligence and enforcement agencies with means to trace property ownership.
  • Amendment of UK sanctions regime to better equip the Office of Financial Sanctions Implementation to enforce financial penalties for sanction breaches and evasion.

Due diligence has always played a critical part in the accounting profession, but accountants and firms must now think about how to increase vigilance, particularly in light of The Act.

We spoke to accountants for advice on how to do just that.

Perform regular CDD procedures for new and existing clients and when client circumstances change

Hitesh Patel, Partner, StoneTurn

With the enactment of the Economic Crime (Transparency and Enforcement) Act, CDD (Client Due Diligence) procedures have never been so necessary.

The purpose of CDD is to understand a client’s identity and business activities, enabling accountants to identify behaviours that appear to be unusual and may indicate suspicious activity.

Effective CDD is a key part of an accountancy firm’s money laundering defences. Firms that fail to perform adequate CDD are exposing themselves to financial and reputational risk.

Firms must apply CDD procedures at various points during the lifetime of the relationship, including:

  • The start of a new business relationship.
  • An occasional transaction.
  • Where there is knowledge or suspicion of money laundering and terrorist financing.
  • When there is doubt about the reliability of identification information.

Prior to performing CDD procedures, accountancy firms should assess the level of risk associated with a client, such as whether they are carrying out transactions involving countries or sectors deemed high-risk in money laundering/terrorist financing or if transactions are conducted on behalf of a Politically Exposed Person.

For clients assessed as higher risk, firms should increase the extent and frequency of CDD procedures.

Next steps:  Accountancy firms can increase vigilance by performing ongoing monitoring of new and existing clients. Firms should also refresh their CDD information when the client’s circumstances change, e.g., a change of beneficial ownership or registered office. For repeat clients, it is also good practice to refresh CDD information if there has been a long gap between engagements. 

In addition, firms should: 

  • Regularly evaluate the effectiveness of their due diligence procedures. 
  • Provide annual training to all staff on CDD procedures 
  • Monitor changes to laws and regulations, and ensure that any updates are reflected in CDD procedures. 

Verdict: Perform regular CDD procedures for new and existing clients and when clients’ circumstances change.

Provide regular money laundering training for staff to ensure they can spot signs and suspicious activities

James Howard, Partner, Haines Watts

 We ask all new clients to provide us with at least two forms of ID and we also use specialist software to help verify this. All new clients have to be signed off by the Money Laundering Officer and then an engagement letter is issued. No work is done until the engagement letter is signed and the ID all on file and verified.

Our software does regular reviews. Money Laundering training is given each year to all employees who are trained to spot any unexpected activities and then report it to the ML office. All staff have to also sign an annual statement of declaration and compliance to report that they are satisfied that there is no money laundering in their portfolio.

Next steps:  Firms should administrate a review of websites and social media before engaging with a new client. They must also ensure professional clearance before issuing an engagement letter or evening speaking to the previous provider directly.

Verdict:  Provide regular money laundering training for all staff to ensure they’re aware of signs and can spot and report any suspicious activities.

Identify Ultimate Beneficial Owners (UBOs) and ensure due diligence and risk assessments are ongoing

Dominic Wreford, Head of Forensic Services, Interpath Advisory

From a legal framework point of view, nothing has changed. The conflict in Ukraine has not changed due diligence requirements, but led to the extension of the existing sanctions regime to a larger number of individuals and entities.

As part of due diligence, firms should seek to establish who the Ultimate Beneficial Owners (UBOs) of the client are – consulting a business register is not sufficient and greater investigation is needed.

We frequently see a lax approach taken to establishing UBOs. Huge public interest in the most recent round of sanctions expansion should serve to heighten the pressure on accountants, lawyers and bankers to tighten up on poorly performed checking.

Firms should also seek to establish political exposure, adverse media, and other indicators that certain client relationships might carry higher risk. This does not necessarily mean that firms should reject these clients, rather, they should monitor them more closely as part of their ongoing monitoring.

Next steps: Firms should consider due diligence and risk assessments as ongoing, continuous exercises, rather than administrative tasks to be undertaken at a single point in time. Seeking specialised jurisdictional expertise can help shed light on opaque, impenetrable structures which may look legitimate on the surface but hide risks.

Verdict: Properly establish the client’s Ultimate Beneficial Owners (UBOs) and ensure due diligence and risk assessments are ongoing, continuous exercises.

Firms must ensure they undertake sanctions screening alongside AML obligations

Jackson Quaker, Professional Standards Policy Development Manager, AAT

There can be a common misconception the Anti-Money Laundering and Sanction regimes are the same. The UK Sanctions Regime has been developed over the same timeframe as the Anti-Money Laundering regime and share many similar objectives. But there are also significant differences.

All UK individuals and businesses must comply with financial sanctions requirements. Solely complying with the AML regime does not mean you have met your responsibilities under the Sanctions regime.

The Economic Crime Bill has made it far easier for the authorities to impose civil fines. There is no longer a need to establish that an individual or organisation had reasonable cause to suspect that they were in breach of a prohibition or had failed to comply with an obligation.

This new lower legal threshold for establishing liability should make those with AML responsibilities take them even more seriously. The potential reputational damage from being suspected of sanction busting is also a wake-up call.

In practical terms, firms should seek to thoroughly assess any exposure they have to any sanctioned persons and entities. Firms must consider all partners or customers and their ownership structures, to identify any direct or indirect sanctioned entities or individuals.

Next steps: Firms should acquaint themselves with the  OFSI ‘Consolidated List‘  list and then consider the risks of involvement from the profile of the work done within the firm and the range of clients. If alerted that a client might be someone on the OFSI consolidated list then you must report to OFSI as soon as practicable if you know or have reasonable cause to suspect that a person:

  • is subject to financial sanctions
  • has committed an offence under the regulations

Verdict:  Alongside existing AML client due diligence processes firms should also ensure that they have implemented adequate sanction screening processes ensuring sanction screening of its clients base is an ongoing, continuous exercise.

Annie Makoff is a freelance journalist and editor.

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