Money laundering is here
by Heather Brehcist
he 1 March 2004 has come and gone and tax advisers are
T finding out what life is like under the new money laundering
regime. This article looks at some of the areas where members have
sought advice in recent months. It is largely based on the CIOT and
ATT anti money laundering guidance which can be found on the
CIOT’s and ATT’s websites.
Members should keep at the front of their mind that any clients
who are engaged in tax evasion are potentially money launderers.
Suspicion of tax evasion will give rise to money laundering
reporting obligations for the tax adviser.
Engagement letters
Some members have asked whether they need to issue to clients
a new engagement letter which would include a paragraph
setting out a tax practitioner’s obligations as a result of the new
money laundering legislation.
Some feel it is important that their clients are made fully aware
of the reporting requirements under the money laundering
legislation; others feel that there is no need to draw a distinction
between that legislation and any other legislation which could
require a member to supply information to the authorities, for
example as a matter of public interest disclosure.
Ultimately this is a matter of practice policy. A practitioner is
under no obligation to advise clients in the engagement letter
that he may be required, at some time in future, to submit a
report to the National Criminal Intelligence Service (NCIS)
should he have knowledge or suspicion of money laundering.
The Proceeds of Crime Act 2002 (POCA 2002) makes it clear that
the duty to report overrides the duty of client confidentiality
(POCA 2002, s. 337) and the member would be protected should
his client claim he has been negligent provided there were
reasonable grounds for the report. However, for business reasons
a member may feel more comfortable including an appropriate
paragraph in the engagement letter and some suggested wording
is set out below.
Suggested wording
If a member wishes to make general reference to his money
laundering reporting obligations before agreeing to act for a
client, he may do so provided that no suspicion of money
laundering has been presently aroused (otherwise he will run the
risk of tipping off the client). The following wording could be
used, amended as appropriate to fit the nature of your practice
(e.g. sole practitioner, partnership or company)
‘This firm/practice is/I am required under the Proceeds of
Crime Act 2002 to make a report to the National Criminal
Intelligence Service if we/I become aware during the course
of our/my professional work, of any circumstances which
give rise to knowledge or suspicion or reasonable grounds for
suspicion of a money laundering offence. The offence of
money laundering may be committed by concealing,
arranging or acquiring the proceeds of any criminal conduct
including the proceeds of tax evasion, even if the conduct
occurs outside the UK.’
8 Tax Adviser March 2004
The need to exercise caution
However, members should take great care to avoid the offence of
tipping off, or facilitating the acquisition, retention etc. of criminal
proceeds, both in any warning given and in any follow-up discussion
concerning the particular tax matter in point.
No warning about money laundering reporting requirements should
be given if any concerns have already emerged. Equally no advice
should be given to clients on how to avoid a money laundering
report to NCIS since to do would be both unethical and might
constitute a criminal offence.
If your client asks you whether you have made a money laundering
report you should decline to answer. Members should generally
refrain from discussing money laundering reporting obligations and
any form of words used in the engagement letter should be settled
by the practice’s legal advisers.
Notice in reception/leaflet for prospective clients
Some members asked whether an alternative approach could be
to place a notice setting out the money laundering reporting
obligations in the reception area of their office or to prepare a
leaflet which is given to prospective clients before any discussions
take place. The intention would be to make it clear to
prospective clients that the practitioner has regulatory obligations
in respect of money laundering including the reporting
requirement. Again, while giving notice in this way is
unnecessary in terms of the law and the Money Laundering
Regulations 2003, this is ultimately a matter of practice policy in
the same way as giving notice in the engagement letter is.
Members, however, should be careful not to be seen as overtly
deterring prospective clients from seeking advice just because
they may be money launderers as it is unprofessional to take any
approach which encourages cover-up.
Alternative suggested wording
There are other situations in which members may be obliged to
make disclosures of what would otherwise be confidential
information, in some cases without informing their clients; for
example where a Taxes Management Act 1970 (TMA 1970), s. 20BA
notice is issued. Members might therefore prefer to use a more
all-embracing form of words in their engagement letters, rather
than expressly referring to proceeds of crime obligations, for
example:
‘Neither we nor you will be prevented from disclosing
confidential information which is required to be disclosed by
law or any professional or regulatory obligation.’
Summary
As noted above, it is a matter of practice policy whether the
engagement letter includes a reference to the money laundering
reporting requirements or not. What is critical is that there is a
signed engagement letter in place which sets out clearly the scope of
the work to be carried out and the terms and conditions of the
assignment.
Record keeping
There are a number of record-keeping issues arising from the new
regime. Members have asked how long the records specified by the
legislation need to be kept. The regulations require records to be
kept of evidence obtained when carrying out identification checks.
A copy of that evidence must be kept or information should be on
file giving clear reference as to where in the practice a copy of that
evidence may be obtained.
Identification records must be kept for a period of five years from
the date the relationship with the client comes to an end. Records
must also be kept of all the transactions that have taken place for a
particular client. Here the retention period is broadly five years
from completion of the transaction.In most cases this requirement
should be met by the client files and the work in progress (WIP)
records.
Firms would also be well advised to keep records of money
laundering training, so that they can demonstrate that they have
complied with the obligation to train relevant principals and staff.
Firms, and indeed every individual within the firm, should for their
own protection keep records of money laundering reports made and
matters considered in deciding whether to make a report. In
particular, either the individual client handler or the money
laundering reporting officer (MLRO) might be called upon at a later
date to justify why a report was not made in a particular case (for
example where another adviser involved did make a report). Hence
any consideration of possible reports should be documented. It is
preferable for these records to be kept confidentially and not on
client files to minimise any risk of the alleged offender inadvertently
being tipped off – the fewer people who know the better.
Knowledge or suspicion and reasonable
grounds for knowing or suspecting
Under the new legislation, as a tax adviser you are obliged to make
a report to your firm’s MLRO or directly to the NCIS if a sole
practitioner if, in the course of your business, you have knowledge
or suspicion of money laundering or have reasonable grounds for
knowing or suspecting money laundering.
What is suspicion?
Suspicion has been defined as requiring a degree of satisfaction, not
necessarily amounting to belief, but at least extending beyond
speculation as to whether an event has occurred or not. It is not
necessary to have actual knowledge of the underlying criminal
activity.
If you are in doubt whether there are sufficient grounds for
suspicion you should make a report to your MLRO (or NCIS where
appropriate).
The reporting obligation is personal to every member as a
practising tax adviser. However, it would be appropriate to discuss
the particular circumstances with the partner responsible for the
client work before making the report if only to test your conclusion.
What are reasonable grounds for knowing or
suspecting?
This is an objective test and involves asking whether a reasonable
person would have known or suspected even if you did not i.e. what
you ought to have known even if you did not.
This could include
Tax Adviser March 2004
● shutting your mind to the obvious;
● deliberately avoiding asking a question for fear of getting the
‘wrong’ answer; and/or
● ignoring matters which would indicate the facts to an honest
and reasonable person.
Illustration
Are there reasonable grounds for knowing or
suspecting money laundering?
Imagine the following situation: a new client comes in to your office
to discuss his tax affairs. As you are going through his various
sources of income it emerges he is about to invest £200,000 in a
friend’s company. From what you know about the client you are
surprised that he has available funds of this magnitude and he is
very vague about their source. Your usual identity checks have not
revealed anything untoward about him, but you remain uneasy
because of his reticence to provide any information about his
£200,000. His response to your questions is: ‘Don’t worry – it’s all
above board.’
Do you have reasonable grounds for knowing or
suspecting?
You do not have knowledge of criminal activity in this scenario.
The facts are solely that a client has a substantial sum of money
which is derived from an unknown source.
You may or may not have suspicion – there is insufficient
information to form an objective view. Additional enquiries could be
made to try and elicit more details. However, you are not required
to carry out investigative work beyond what you would normally do.
Indeed to do so might well risk your committing the offence of
tipping off. In the absence of any more conclusive evidence you
may conclude it would be prudent to submit a report to protect
yourself and your practice’s position. However, it is a judgement call
and equally you might, after careful consideration of the available
facts, conclude a report was not necessary.
In the event of any allegation that the tax adviser had failed to
make a report when he should have done so, it would be for the
courts subsequently to decide whether a report should have been
made, but it would seem harsh for the court to criticise a tax adviser
who had carefully weighed up what little evidence was available and
had concluded there were insufficient grounds to trigger a report. In
any event you may be well advised to keep a record of the reasons
why you reached your decision.
From a practice perspective, it would be advisable to decline to act
unless your client was prepared to reveal the source of the
£200,000 – it is essential that client and adviser are able to trust
each other and your enquiries would be regarded as reasonable
enquiries to make in the course of acting in respect of a private
client’s tax affairs.
Defences
What happens if you fail to make a money laundering report when
you should have done so? Such a failure is potentially a criminal
offence, but there are three statutory exceptions which might be
used in your defence.
It will not be an offence if one of the following applies:
(1) Reasonable excuse
You have a ‘reasonable excuse for not disclosing the information or
9
 other matter’. Precedent has yet to emerge as to what might be
regarded as reasonable excuse. However the courts would be likely
to take into account whether you have followed the CIOT’s and
ATT’s (and possibly other professional bodies’) guidance when
determining whether an excuse is reasonable or not.
(2) Professional legal adviser
You are a professional legal adviser and the information or matter
came to you in privileged circumstances. Current interpretation of
the legislation is that this opportunity for not making a report will
not be available to you unless you are a practising solicitor or
barrister.
(3) Lack of training
You do not know or suspect that another person is engaged in
money laundering and you have not been provided with training in
accordance with the Money Laundering Regulations 2003 by your
employer. If you are practising as an employee in a firm, your
employer has obligations to train you properly and it would be a
defence to say you did not realise a report was needed if you have
not received proper training. It is likely, however, that this defence
would be difficult to rely on if you have a professional qualification.
Conclusion
New legislation can be daunting to deal with. This legislation is
particularly challenging not least because of its wide-ranging scope
and complexity, but also because of the stringent penalties and
prison sentences which can be imposed for failing to ‘get it right’.
There remain areas which present practical difficulties and the
Institute and the Association are continuing their discussions with
various government departments on these. As soon as an agreed
position is reached we will put this information on our websites. In
the meantime, if there are any areas which you would like to see
covered in a future Tax Adviser article, please let us know by
e-mailing: askstandards@ciot.org.uk.
Heather Brehcist is Standards Officer at the Chartered Institute of
Taxation.

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