Trust or Company Service Providers, are you aware of the risks your business might face?

TCSPs are at high risk of being exploited. Here’s what to watch out for.

Trust and Company Service Providers (TCSPs) play a crucial role in the global financial landscape, assisting clients in establishing and managing trusts, companies, and other corporate entities.

Many TCSP clients create intricate ownership structures that involve multiple offshore entities and nominee shareholders or directors. This complexity can obscure the flow of funds and make it challenging to detect and prevent money laundering activities.

As such, TCSPs are at a high risk of being exploited for illicit purposes, including money laundering and terrorist financing, with that risk increasing when provided with other financial, legal, or accounting services. 

What is a TCSP?

Under the money laundering regulations, a trust or company service provider is any company or sole practitioner whose business is to:

• form firms i.e. companies, limited partnerships or other legal persons
• act, or arrange for another person to act:
  • as a director or secretary of a company;
  • as a partner of a partnership; or
  • in a similar capacity in relation to other legal persons
• provide a registered office, business address, correspondence address or administrative address for a company, partnership, or other legal person or arrangement 
• act, or arrange for another person to act, as a trustee of an express trust or similar legal arrangement
• act, or arrange for another person to act, as a nominee shareholder for another person, unless the other person is a company listed on a regulated market which is subject to acceptable disclosure requirements.

Risk characteristics

The Accountancy AML Supervisors Group Risk Outlook identifies the risks of TCSP services in the accountancy sector as being highest when coupled with other high-risk services or high-risk factors, such as a client in a high-risk country. There is also a high risk when a new client approaches a firm for a one-off company formation, with no ongoing services required.

Accountancy sector firms that offer registered office or nominee directorships are also at risk of exploitation as those services can enable the concealment of beneficial ownership. Law enforcement have indicated that many investigations into money laundering have led to complex corporate structures. By creating structures that disguise the ownership of assets, the accountant may be either wittingly or unwittingly involved in ‘integration’ of the illicit funds into the legitimate economy.

HMRC has recently updated its risk assessment of TCSPs and published updated guidance on Understanding risks and taking action for trust and company service providers.

Firms can also access further guidance through:

• Issue 21 of the UKFIU’s SARs in Action magazine – contains an alert published by the National Economic Crime Centre (NECC) around the high-risk behaviours and typologies associated with the TCSP sector, with a list of indicators for potentially suspicious companies formed by TCSPs

• Issue 29 of the UKFIU’s SARs in Action magazine – includes key characteristics linked to illicit company formation highlights the red flags firms should be looking for when forming companies

• UKFIU Podcast – Episode 20: Illicit Company Formation: The Public Private Partnership Response – panellists discuss the recent work that has been done on illicit company formation activity and transformations to Companies House following legislative changes

• AAT’s Anti-money laundering and ethics area within Knowledge Hub

What due diligence is needed?

Firms are required to carry out a firm-wide risk assessment that takes into account the customer base and the nature of the services the firm provides so that policies, controls and procedures can be put in place to counter any risk of the firm being exploited for money laundering,  terrorist financing, or proliferation financing (ML/TF/PF) purposes.

TCSPs must identify who their customers and beneficial owners are, and what levels of due diligence are appropriate. Policies, controls and procedures should document the firm’s approach when dealing with intermediaries and when placing reliance on third parties or accepting due diligence undertaken by others.

To mitigate ML/TF/PF risks, TCSPs should conduct thorough background checks, verify the source of funds, and regularly update client information. Enhanced due diligence is necessary when dealing with high-risk clients, high-risk jurisdictions, or politically exposed persons (PEPs).

Maintaining detailed records of client interactions, transactions, and corporate structures is essential. These records should be readily available for regulatory inspections and audits.

TCSPs should adopt a risk-based approach to their services. This involves assessing the specific ML/TF/PF risks associated with each client and tailoring their due diligence and compliance efforts accordingly.

When risk assessing a client, firms should consider location, complexity, sources of wealth, PEP status, nature of services and client’s business, and transparency. Those holding client money should always consider the handling of client money, along with the nature of the client’s business, the purpose of the business relationship and sources of wealth.

HMRC’s TCSP register

Firms (including sole practitioners) providing any TCSP services that are not registered with the Financial Conduct Authority (FCA) must be included on HMRC’s TCSP register maintained under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017). Firms are prohibited from providing TCSP services unless they are on HMRC’s TCSP register.

To be included on HMRC’s TCSP register, firms must be registered with a supervisory authority under the MLR 2017. Firms that are registered with a professional body supervisor under the MLR 2017 do not need to separately apply to HMRC for supervision.

Professional body supervisors notify HMRC of all the firms (including sole practitioners) they supervise that perform trust or company service work by sending HMRC the name and address of each business and confirming they are ‘fit and proper’. HMRC will then review this information and may carry out further checks before confirming approval. 

AAT notifies HMRC of all licensed members who are approved to provide Company Secretarial Services (trust or company services) and have registered their firm, or firms, with AAT for AML supervision to be included in the register. If you are an AAT licensed member providing TCSP services, please ensure you have been approved to provide Company Secretarial Services (trust or company services) as a specific area under your licence and have told AAT about of each of your firms providing TCSP services.

If you need to apply to add TCSP services to your AAT licence, here is where you can do so.

Any AAT member who is in public practice and is providing trust or company services whilst not on the register may be subject to disciplinary action by AAT and/or criminal or civil penalties by HMRC.

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