UK: Money Laundering And Recruiters - The Latest Developments

Last Updated: 24 April 2008
Article by Kevin Barrow, Warren Foot, Frances Lewis and Bridget Wood

Extension of money laundering registration deadline for executive search companies

HMRC have today (26 March 2008) confirmed that the deadline by which executive search companies must file their applications for registration under the money laundering regime has been extended to 31 May 2008 – see the HMRC announcement at www.hmrc.gov.uk/mlr/service-providers260308.htm

This obligation to register applies to recruiters who place directors, company secretaries, partners and the like.

This confirmation is good news for the recruitment industry. It may also signal a re-think as to whether recruiters placing director level candidates need to be treated as regulated under the Money Laundering Regulations 2007 (the Regulations), which would be even better news.

Executive search companies - why do they appear to be caught by the money laundering regime?

There has been much debate over the last few weeks about whether or not executive search companies should be caught by the Regulations. The issue stems from the wording of the Third Money Laundering Directive which refers to the regime (with all the bureaucracy it entails) applying to anyone who "by way of business arranges for another person to act as a director or partner or in a similar position". The wording of the Directive is not something which the UK Government would necessarily have had much control over and so it would be wrong to conclude that this is an example of the UK Government causing problems for recruiters. The UK Regulations implementing this Directive on 15 December 2007 repeated the Directive's wording, because that is effectively what the Government is obliged to do when implementing Directives.

HMRC have stated in guidance issued both in November 2007 and February 2008 (see MLR 9 on the HMRC website) that their interpretation of the Regulations is that this wording captured employment agencies placing directors and the like. As a result, HMRC Guidance has, until this afternoon, been that recruiters carrying out this type of activity were caught by the Regulations, should therefore apply by 1 April 2008 to go on a special register and should from 15 December 2007 put in place sufficient policies and procedures to comply with the Regulations.

The basis for placing this burden on recruiters who place directors and the like appears to have been that, for public policy reasons, people who 'help' others set up and run companies and partnerships (including finding people to act as statutory officers) need to be placed under a duty to do customer due diligence etc. to help make sure that the companies etc. they help set up and run are not used for nefarious purposes. The underlying concern on the part of legislators and regulators is that businesses which help others set up and run companies are considered to be at risk of being targeted by criminals seeking to launder the proceeds of crime or finance terrorism.

As we have said in our previous briefings on this regime, it is, however, very hard to see how recruiters (whose clients generally do not share that much information with them about their activities) would actually come across circumstances that may give rise to reportable suspicions of money laundering or terrorist financing. Accordingly, it seems disproportionate to apply the very burdensome regime to them.

Nevertheless, given that:

  • the Regulations are already in force (and have been since 15 December 2007)
  • the current guidance issued by HMRC is that the Regulations cover this recruitment activity
  • there are very serious penalties for failure to comply, many recruiters had considered that, whether or not this legislation is appropriate, there is really no option other than to take steps towards compliance as soon as possible and to stay compliant until any further movement on this issue at Government level

There are also commercial reasons why many recruiters have been deciding that they have to take a cautious line whilst the application of the money laundering regime to them is still unresolved. This is because, in any forthcoming corporate transaction such a recruiter enters into or annual audit it undergoes, the various due diligence teams sent in by advisers may have no option other than to qualify their reports with statements about the recruiter's possible non compliance with the money laundering regime. This could have a serious effect on the value of the relevant recruiter.

Further extension of registration deadline for executive search companies

Two weeks ago we obtained clarification from HMRC about the registration process and how they intended to deal with the fact that many recruiters in the executive search area were struggling to get their applications ready for registration in time. HMRC were reasonably sympathetic with the position and confirmed that their policy was that the application for registration simply had to have been submitted by 1 April 2008. HMRC further confirmed to us that if an application received before 1 April 2008 was refused, they intended to allow rejected applicants a period of grace within which to rectify their application (eg put forward an alternative responsible individual in the event that one of those originally put forward had not satisfied the 'fit and proper' test).

Today brings even better news. The deadline for application to the register has now been extended to 31 May 2008. When we spoke to HMRC two weeks ago they confirmed to us that only a handful of recruitment companies had applied to register at that stage. We warned them to expect an avalanche of applications from recruiters and that many might miss the deadline because they just were not aware of it. This would potentially have left an unpleasant situation in which many (otherwise) thoroughly law abiding and reputable recruiters, relied on by a wide range of employers in the private and public sector, would technically have been trading unlawfully from 1 April and subject to serious criminal penalties, with all their trading income potentially being the 'proceeds of crime'.

Will the regulators now re-think the money laundering regime for recruiters completely?

The developments in relation to the registration deadline show that the regulators are aware of the problems recruiters are having with this regime. Indeed the extensions may signify something more helpful still. The regulators may now consider a fundamental reappraisal of the application of the regime to recruiters.

As mentioned above, HMRC currently state in official guidance (issued in November 2007 and again in February 2008) that, in their view, placement of director/partner level candidates is now within the regulated sector (see MLR 9 on the HMRC website). They have, however, today stated that they will be updating this guidance in light of comments they have been receiving about the impact of the regime on recruiters who do executive search. This updated guidance should be available before the new registration deadline of 31 May and so recruiters who do executive search can now wait until they see that guidance before they decide whether or not to register. It seems possible that executive search will be exempted from the regime altogether.

Continuing problems with 'payroll' operations

Today's announcement does not touch on the even more problematical issues relating to the application of the Regulations to 'payroll' services performed by employment businesses. HMRC have stated in correspondence with us that 'payroll' services, including any payment intermediary service by a recruiter acting as an employment business, could be caught. In other words every staffing company supplying temps or contractors may have to comply with the new regime.

We do not agree with this view. We are working to clarify the position with HMRC. It does seem possible that, other than certain 'payroll only'/'payroll agency' services, HMRC will accept that recruiters performing payment intermediary services in relation to temps and contractors are not within the regime. They may also accept that even in 'payroll only' deals the regime will not apply provided those 'payroll' services are part of a general package of 'contractor management' services. On the other hand we consider that employment businesses which perform 'payroll only' deals or 'payroll agency' deals (perhaps in association with VAT mitigation or contractor migration or 'we'll take over payment of your direct contractors for you' projects), with clients seeing the recruiters primarily as 'payroll' service providers when they do this, may well fall within the regime. The devil will be in the detail of the services performed of course.

What should you do now?

In the meantime, because the regime came into force on 15 December 2007, and it is now a criminal offence to conduct regulated activity without first complying with the Regulations, we can regrettably only advise that recruiters must take a cautious approach:

  • If they do any 'payroll only' deals or 'payroll agency' deals (perhaps in association with VAT mitigation or contractor migration or 'we'll take over payment of your direct contractors for you' projects), with clients seeing them primarily as 'payroll' service providers when they do this, they should treat themselves as if they are regulated and immediately adopt compliance measures. Even the most generous reappraisal by regulators of the application of the regime to recruiters seems unlikely to exempt 'pure payroll' services
  • If they do any other type of payment intermediary services they should hope that the regulators issue clear (and favourable) guidance as soon as possible and in the meantime take advice about their position. Many recruiters will take the view that the prudent and safest course of action will be to treat themselves as being regulated until such time as formal guidance is issued by HMRC stating the alternative
  • If they do executive search they should review carefully the forthcoming updated HMRC guidance as soon as it is available and in the meantime take advice about their position. It may be that many recruiters will take the view that the safest course of action will be to treat themselves as being regulated (in accordance with current guidance) until such time as formal updated guidance is issued by HMRC stating the alternative. However, recruiters carrying on executive search may instead decide to wait until the new guidance is issued before deciding whether or not to treat themselves as caught by the regime. This seems a very understandable attitude to take it seems very unlikely that any regulator or enforcement agency would challenge this approach
  • So far as registration deadlines are concerned, pending further clarification from the regulators
  • those recruiters providing 'payroll only' or 'payroll agency' services appear likely to be obliged to register (application to be made by 1 July and to have been accepted onto the register by 1 October 2008)
  • those recruiters providing relevant executive search services should, if they are still caught after the updated guidance is issued, apply to register before the new deadline of 31 May 2008

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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