The Money Laundering Regulations 2003 are now in force in the UK and apply to 'relevant business' in the newly expanded 'regulated sector'. But what are the practical implications of this for firms of lawyers or accountants? Both the Law Society and the Consultative Committee of Accountancy Bodies have recently published bulky new guidance. This should be required reading for money laundering reporting officers in law and accountancy practices.
Businesses now in the regulated sector should already have made preparations for the new regime including the appointment of a money laundering reporting officer (MLRO) and a deputy to provide cover for holidays and sickness, the training of relevant staff and the introduction of forms and procedures for internal reporting of suspicions of 'money laundering'.
Staff training should have included guidance on which activities of the firm are now 'relevant business' falling within the 'regulated sector'. For lawyers the main focus will be on work in relation to financial or real property transactions and services in relation to the formation, operation or management of a trust or a company. For accountants the principal types of relevant business are accountancy, audit, tax and insolvency services. Investment advice has been 'relevant business' since 1994.
The Law Society has indicated that the provision of legal advice, participation in litigation, will writing and publicly funded work would not generally be viewed as 'relevant business'.
The first practical impact of the new regulations is likely to be the need to obtain documentary identification of a new client who wishes to instruct your firm to undertake 'relevant business'. Where a new business relationship is formed (in effect when you agree to act for a new client) the regulations require that as soon as is practicable after contact is first made, you obtain evidence of the new client's identity. This means that either the client must produce such evidence to you, or you should obtain it from elsewhere, or a combination of both. Identity records are required to be retained for five years after the business relationship ends.
Identification is not required in respect of a one-off transaction, which you neither know nor suspect involves money laundering, and which does not involve payment of more than 15,000 euro (about £10,000) by or to the client. In certain other cases specified in regulation 5 identification is not required. In practice many professional firms have opted to routinely seek identification evidence from all new clients.
Typically you will ask an individual new client whom you meet to produce his passport, or other identification incorporating a photograph, and a recent bank statement, utility bill or similar to confirm his address. You will photocopy the relevant page of the passport (in monochrome) and the utility bill and pass the copies to your MLRO to put on his permanent file. Job done!
The next problem may arise when someone in the office reports a suspicion. Any criminal offence which produces proceeds or a cost saving is likely to involve a money laundering offence. So in many offices up and down the country reports of suspicions will be landing on the MLRO's desk this week.
Accountants are particularly concerned that their examination of clients' business records will inevitably lead to them having information which gives reasonable grounds for suspicion of money laundering offences which will necessitate a report. Many such reports will serve no useful purpose as the reports will cover matters of which the authorities are already aware or about which no action can be taken.
For example, where a client under investigation by the Inland Revenue admits to them in the presence of his accountant that he has dishonestly under-declared his income, a report must be made by the accountant to his MLRO who will in turn report to NCIS. Almost certainly NCIS will simply forward the report to the Inland Revenue, serving no purpose. Equally a client suffering stock 'shrinkage' from suspected pilfering will be reported to NCIS although the identity of the thieves is unknown.
The accountancy bodies have agreed with NCIS a new shorter report form to be used in cases of lesser intelligence value, such as stock 'shrinkage', which will provide some relief. At the same time NCIS has introduced a new style preferred full report form which is now available for download on the NCIS website.
MLRO's should use the new preferred forms from now on.
Becoming concerned in an arrangement
Solicitors have been worried in the recent past about the extent of Section 328, Proceeds of Crime Act 2002, which relates to 'becoming concerned in an arrangement' which facilitates the acquisition, retention, use or control of criminal property by or on behalf of another person.
Paradoxically, interpretation of Section 328 has now become less important since a report to the MLRO will often be required under the regulations in cases where this section applies. The MLRO will then report the matter to NCIS. Such a report will effectively remove the risk of prosecution for the solicitor under Section 328.
Care will still be needed however where a report is not made under the regulations. This could arise because of an exemption in the regulations, for example where information is received in privileged circumstances, or where the regulations do not apply because the work falls outside the definition of 'relevant business'. Here a report under Section 328 may be necessary because the section contains no exemption for privilege and is not limited to 'relevant business'.
The regulations require that a report be made as soon as practicable once the solicitor or accountant has information which gives him reasonable grounds for suspicion that another person is engaged in money laundering. Accordingly it may be necessary to make a report earlier under the regulations than would previously have been necessary under Section 328. Reports will also be required under the regulations in circumstances in which no report would be required at all under Section 328, for example where a solicitor receives information in the course of 'relevant business' concerning a matter in which he does not 'become concerned'.
Suspicion of tax evasion
Suspicion of tax evasion is likely to be the most common cause of reports to NCIS by accountants. Indeed accountants may be required to make several reports over a 12 month period concerning the same client where tax evasion is suspected. Separate reports may be required in connection with quarterly VAT returns and half-yearly income tax payments as well as annual PAYE returns and other matters.
Where a client's records examined after 1 March 2004 include details of taxes paid or refunded after 24 February 2003, when Part 7 Proceeds of Crime Act 2002 came into force, the accountant will need to consider whether there are reasonable grounds for suspicion that a money laundering offence may have been committed at that time. This may involve re-opening old files relating to periods beginning as long ago as May 2001.
Lawyers and accountants may, in the course of relevant business, become aware of reasonable grounds for suspicion of other offences.
Take the solicitor assisting his client in the sale or purchase of a business. In the course of negotiating warranties he may become aware that the business has failed to comply with certain legal requirements, say, relating to health and safety law. If he has reasonable grounds to suspect that these failings were deliberate and that financial 'savings' resulted from them, he will be obliged to report these matters to his MLRO who will report to NCIS.
An auditor discovering that his client has required the resignation of an employee in a case of petty theft can now be expected to file a report with NCIS, since the auditor will have reasonable grounds to suspect the employee of the money laundering offence of possession of the proceeds of his crime.
It is to be expected that many offences which would not previously have come to the attention of the authorities will now be reported to them via NCIS.
No doubt lawyers and accountants will soon get used to making reports to their MLRO and onward to NCIS under the new legal regime – just as we have dealt with previous upheavals in our professional lives.
Welcome to the 'regulated sector' – go forth and report!
David Winch, B.Com., F. C. A. is a forensic accountant specialising in white collar crime including theft, fraud, false accounting, evasion of taxes and duties, drug trafficking, Companies Act offences, money laundering, and associated confiscation, forfeiture and disqualification proceedings.
David is always willing to review a case and give informal initial assistance on a no charge and no obligation basis without legal responsibility.
David is a director of Accounting Evidence Ltd and can be contacted at:
Accounting Evidence Ltd
T 0161 209 3270
F 0161 209 3001
M 07816 767154
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