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The accountant

and the fight


against money
laundering

Date : July 2006


Speaker : John Davies
Head of Business Law
ACCA (London)
What is money laundering?

Money laundering is the


process whereby criminals
attempt to conceal the true
origin and ownership of
the proceeds of their
criminal operations
The object of anti-money
laundering (AML) controls

To discourage criminal activity by ensuring


that criminals who try to use the financial
system for laundering the financial
proceeds of their crimes can be identified
and their funds confiscated
Possible warning signs of money
laundering activity

Unusually large deposits of cash made by an individual


or company whose affairs would normally generate
deposits by cheque or bankers’ draft

Substantial increases in cash deposits without apparent


cause

Customers depositing large numbers of smaller cash


amounts which together make up a substantial sum

Reluctance by a customer to provide routine information


when opening an account; providing information which is
difficult or expensive to verify

Large cash withdrawals from a hitherto dormant/inactive


account
The global scale of money
laundering
• World-wide money laundering could amount to 2 –
5% global GDP ($590 billion - $1.5 trillion)
(IMF)

• £25 billion of criminal assets are laundered through


the UK financial system every year
(UK Govt estimate)

• $3.5 billion is laundered though the Australian


financial system each year
(AUSTRAC estimate)
Why are AML controls important?

• Most national governments have signed up to international


AML conventions so are obliged to implement international
norms

• If lenders feel that a country’s AML controls are defective


this could affect availability and cost of lending to that
country

• Countries do not want to give out the message that crime


pays

• National financial infrastructures have a direct interest in


preserving their reputation for sound finances
The Financial
Action Task
Force
(FATF)
www.fatf-gafi.org
The role of FATF

• Monitors developments in money laundering


techniques

• Conducts evaluations of individual countries’ AML


controls

• Issues detailed recommendations for AML controls

• Remit now covers terrorist financing


FATF finding, 1999

‘We have observed an increasing


tendency for professional service
providers, such as accountants,
solicitors, company formation
agents and other similar
professionals, to be associated
with more complex money
laundering operations.’
FATF recommendations for
accountants
• They should take steps to establish the identity of their
clients (client due diligence – CDD – procedures)

• They should keep records of their CDD data for 5 years

• They should adopt internal programmes for guarding


against money laundering and terrorist financing

• They should be required by law to report to designated


authorities where they suspect or have reasonable grounds
for suspecting that funds are the proceeds of money
laundering or terrorist financing
The source of global rules on
money laundering
Financial Action Task Force (FATF)
recommendations

Australia
EU law NZ
Law
Law
UK law
AUSTRAC
rules Police
guidance

Professional
guidance
for accountants
Money
Laundering -
ACCA
guidance
ACCA statement 3.8 on money
laundering
• Applies to members world-wide

• Para 4 – members should be aware of their obligations under local law

• Para 6 – member firms should establish in-house policies and practices and
ensure their staff are properly trained on AML issues

• Para 8 – member firms should carry out CDD checks when a prospective client
approaches it

- You must obtain independent advice of the client’s identity, e.g. passport
and proof of address

- Where the company is a company you should


- obtain proof of corporate status
- establish the company’s business and registered address
- establish the structure, management and ownership of the company
- establish the identity/authority of those who are instructing you

• You must establish precisely what the new client is asking you to do

IF YOU CAN’T ESTABLISH IDENTITY DON’T WORK FOR THE NEW


CLIENT!

• Para 19-21 – where you know or suspect that funds derive from crime, report
your suspicions to the relevant national authority (where one exists)
ACCA statement 3.8 on money
laundering (contd)
What is suspicion?

‘Suspicion is more than speculation but


falling short of proof based on firm
evidence. A particular set of
circumstances which may be
suspicious in relation to one client may
not be suspicious in relation to another
client. Therefore the key to recognising
a suspicious transaction is for members
to have sufficient understanding of
clients and their activities.’
Should you suspect? (1)

• You know your long-standing client enjoys


occasional private (and legal) gambling. His
record is unexceptional. One day you see him
driving an expensive new sports car which
would normally be beyond his means. As far as
you can tell his business is proceeding as
normal.

• Provided you are satisfied that your


client is an honest person and is
telling the truth, there is nothing here
that should necessarily cause you to
suspect that your client is dealing in
the proceeds of crime.
Should you suspect? (2)

• Your client runs a restaurant. On checking the


accounting records of the company in the course of
preparing its annual accounts, you notice that there
is a very significant rise in the amount of cash
takings over the previous year which seems to you
unusual and difficult to explain given your
understanding of the performance of similar
businesses. You further find that a number of
invoices appear to be made out to companies
which, on further examination, do not appear to
exist. Your client is unable to answer your queries
to your satisfaction.

• These details may give you cause to suspect that


your client is dealing with the proceeds of crime.
Should you suspect? (3)

• You are aware that a new client’s business has


made large taxable profits over a period of time.
You come across information which reveals that
information presented to the tax authorities in
the past has substantially underestimated the
taxable profits and hence the company’s tax
liability.

• This gives you evidence which should cause


you to suspect that your client is dealing with
the proceeds of a crime.
• ACCA Technical Fact Sheet 94 (accountants’
AML responsibilities in the UK
-www.accaglobal.com/transparency/money
laundering)

• Don’t tip off your client that you have reported


him

• But advising a client not to break the law does


not constitute tipping off
Money
Laundering –
European
legislation
EU Second Directive – obligations
imposed on (among others)

Auditors, external accountants and tax advisers

Notaries and other legal professionals

Trust and company service providers

Real estate agents

Natural and legal persons who trade in goods where they


are sold to one client for 15,000 euros or more (either in
one or a series of transactions)
EU Second Directive –
compliance obligations

Internal procedures – firms must put in place adequate and


appropriate procedures for record keeping, internal control,
risk assessment, risk management and communication
designed to forestall and prevent money laundering or
terrorist financing

CDD checks – firms must verify clients’ identity by reference to


documents, data or information obtained from a reliable and
independent source

Reporting of suspicions – member states should establish


financial intelligence units and require regulated persons to
report to them where they know, suspect or have reasonable
grounds for suspecting money laundering or terrorist
financing

Prohibition against tipping off


UK implementation of the
Second Directive

The Proceeds of Crime Act


2002

The Money Laundering


Regulations 2003

www.hmso.gov.uk
Areas of difficulty with the
UK approach

• Applies to practising accountants, auditors


and tax advisers without restriction

• The ‘all crimes approach’ –


any crime which produces financial benefit
comes within scope of money laundering
law and needs to be reported

• Extremely stiff criminal penalties – 5 years


jail for failure to report, 2 years jail for
failure to set up in-house AML procedures
and 14 years jail for active involvement in
money laundering
AML controls
in Australia
AML controls
FATF assessment of Australia’s ML
controls (1996)

‘Australia can pride itself on a well-


balanced, comprehensive and in many
ways exemplary system, and must be
congratulated accordingly. It meets
the objectives of the FATF
recommendations and is constantly
reviewing the implementation of their
AML provisions, simultaneously
looking well ahead into the future.’
The Anti-Money Laundering and
counter-terrorism Financing Bill
(December 2005)
Adopts two-tier approach to regulation – primary obligations set down in legislation, detailed technical
• guidance to be set out in AUSTRAC guidance

No application to accountants and auditors as such – AML obligations applied only to ‘reporting entities’
• which provide ‘designated services’, e.g.
− providing a safe deposit box or similar
− as a licensed financial adviser, giving
personal advice on securities,
derivatives, life insurance or pensions
− acquiring or disposing of a security on
behalf of another person

Rec 14 – exemption from liability for tipping off


Rec 15 – Institutions to set up in-house control procedures


Rec 16 – above provisions to be extended to accountants et al


Reg 24 – Governments should regulate parties with money laundering duties



Features of the draft Bill
• Obligation for reporting entities to carry out CDD checks (though AUSTRAC will
identify low-risk circumstances where CDD checks will not be required)

• Requirement for reporting entities to report to AUSTRAC where


− you have reasonable grounds for suspecting that
information you have gained from providing a designated
service
- may be relevant to the investigation of an evasion or
attempted evasion of a tax law
- may be relevant to the investigation or prosecution of a
person for an offence against a law of the Commonwealth
or of a Territory
- may be of assistance in the enforcement of the Proceeds of
Crime Act 2002 or regulations made under it
- you have reasonable grounds for suspecting that the provision
or prospective provision of the service may be relevant to the
investigation or prosecution of a terrorism offence
Features of the draft Bill (contd)

• Obligation to put in place wide-ranging, on-going AML


programmes within a specified period of providing
designated services for the first time; these must aim to
identify and materially mitigate the risk that its activities
may be used for purposes of money laundering or
terrorist financing. AUSTRAC to issue detailed
compliance rules

• Breaches of obligations under the Bill punishable by


imprisonment of up to 2 years and 120 penalty units or
both
Implementing
AML controls
– issues and
options
Who needs to be covered by
AML controls?
• FATF requires governments to regulate activities of accountants only
where they prepare or carry out specified activities, viz
- Buying and selling real estate
– Managing of client money, securities and other assets
– Management of bank, savings and securities accounts
– Organisation of contributions for the creation, operation or management of
companies
– Creation, operation or management of legal persons or arrangements,
and buying and selling of business entities

• ‘Where a financial activity is carried out … on an occasional or very


limited basis… such that there is little risk of ML activity occurring, a
country may decide that the application of AML procedures is not
necessary, either fully or partially.’
Definition of criminal conduct for
ML purposes

• Must be a clear legal definition of conduct which gives rise to an


obligation to report

• FATF recommendations say that reportable activities should apply to


‘serious offences’ punishable by imprisonment of at least 6 months

• Setting a threshold of seriousness would help avoid excessive and


innocuous reporting
The meaning of suspicion

The draft Bill requires reporting entities to


report not on the basis of proof but where they
have reasonable grounds for suspicion – need to
establish (via AUSTRAC guidance) the meaning
of ‘suspicion’ and ‘reasonable grounds’
Who should accountants report
to?

FATF allows governments to allow professional


advisers to make their suspicious activity reports
not direct to government agencies but to self-
regulatory agencies, e.g. professional bodies
Intra-firm arrangements

AUSTRAC to issue detailed rules to supplement primary


legislation

Should be adequate to ensure that all members of a firm pass


on information to a designated compliance officer/money
laundering reporting officer, who should make final reporting
decision on firm’s behalf
Confidentiality issues

Essential that regulators respect the


confidentiality of advisers who report on their
clients – if advisers are obliged not to tip off their
clients, the system must not do so either
Implications for adviser-client
relationship

Requirements to report clients very difficult issue for


professional advisers

Risk is that clients will withhold information –


threat to quality of professional service and
effectiveness of the AML reporting system
Regulatory effectiveness

Chosen form of AML regulation needs

- a clear and justifiable purpose

- to be effective and proportionate


AML controls – final thoughts

Accountants must always comply with the law

Accept that accountants are part of the financial services sector


and may sometimes be privy to information which may be linked
to financial crime

BUT AML controls must not involve regulation for its own sake –
must avoid intrusive bureaucracy and respect integrity of the
adviser-client relationship
Thank you