8 key AML facts accountants should know

The scenario depicted two accounting businesses working with a client who presented a money-laundering risk. The client, the owner of an ailing hospitality business, is advised by his long-time accountant to close at least one of his restaurants. Instead, he brings in an investor – a family member from overseas. At the investor’s insistence, the business owner moves some of the accounting work, including payroll management, to a second, smaller firm. The existing accountant refers him to an old friend for that payroll work. 

The hospitality business is soon thriving, with drastic increases in revenue. 

However, neither the old nor the new accounting firm meets the new overseas investor, nor does either conduct customer due diligence (CDD) checks on him. The new firm also doesn’t flag anomalies in the payroll. 

Finally, the principal of the newer accounting firm becomes suspicious. Visiting the restaurant, she sees it empty aside from a private function upstairs – where she is prevented from going.

She submits a Suspicious Activity Report (SAR). 

The investor, it turns out, had been using the hospitality business as a front to launder money, and trafficking workers.

The scenario and the discussion at the event highlights eight AML rules and insights that many accounting professionals may not be aware of.  

1 A history of referring good clients does not count as CDD

In the scenario, the new accounting firm takes on the client via referral from a larger firm and a long-term acquaintance. It is easier to assume the larger firm has conducted CDD – however this is not enough.

Any firm working with a new client must conduct and make a record of its own checks – and in this case would likely need to conduct enhanced customer due diligence. 

In this case, the new firm should have conducted CDD on the business as a whole, and both firms should independently have conducted and recorded their CDD on the new investor. That CDD would have included asking why someone would invest in a business that is failing.

CDD should also be revisited on an annual basis – has anything changed in the business or with the directors? 

2 If you are surprised, consider being suspicious

Both accountants are surprised that the hospitality business’s revenue increased dramatically without drastic intervention such as a renovation. Only one submitted a SAR, however.

Both accountants in this situation will be adversely affected – the money-laundering risk had gone undetected and unreported for too long. 

3 Tipping off is an offence – and a safety issue

The accountant who does submit a SAR tells her peer she has done so, and this is an offence. 

That information, even within a professional relationship, should not be divulged. When we discussed the underpinning reasons for that, most in the room cited regulations. 

But additionally, the first accountant had been working with the client for many years – the accountant who submits the SAR has no way of knowing that he isn’t inadvertently or actively involved with the crime.

Divulging her involvement puts her safety at risk, as well as the safety of any other sources. SARs are not anonymous, but the source can never be shared.

4 Victims are often not visible in the client/accountant relationship

I asked the audience who, in their opinion, was a victim in this scenario – the first answers identified the accountants and the staff within the two firms.

And those people were adversely affected, without doubt. But they were makers of their own downfall to an extent – they didn't follow due process, they had poor leadership, they didn't exercise professional scepticism.

The victims in this particular scenario are the people that have been trafficked into slavery, and their families and friends. 

For a reminder of the importance of mitigating the risk of money laundering, accounting firms may arrange paid volunteer time for employees, during which they can work with charities that assist the victims of crimes that money laundering enables or hides. 

5 Separating your records mitigates continuity risk

In this scenario, investigators will seize all records related to the client’s business. In the past, I have seen accountants lose access to all of their client records during an investigation – not just the client in question – because their records were not separated. 

This is far less of a risk today, with broad uptake of digital accounting platforms that do hold client records separately, but well worth noting for those not yet operating in the cloud. 

6 When submitting a SAR, send a tracked disengagement letter

Submitting a SAR alone is not enough, nor is disengaging – an accountant suspicious that their client is involved in money laundering must do both. 

An individual under investigation may claim their former accountant is still acting as their current accountant – a record of sending a disengagement letter is a valuable tool to avoid being caught up in a time-consuming and potentially damaging investigation.  

7 Processing payroll requires an eagle eye 

When I asked the audience whether they would spot some of the issues in this scenario, in particular payroll discrepancies, including multiple employees with similar or shared bank details and residential addresses, many said they would not. 

Payroll is often considered a simple transaction to process, rather than a process that requires risk management. That process should involve analysing the payment information for similar bank accounts or similar addresses, and ensuring clients provide proof of right to work and insurance certificates.

Even quite small payrolls require the accountant to exercise professional scepticism.

8 AML regulations and processes protect accountants 

An accountant who doesn’t have the appropriate processes in place or follow them can be embroiled in an investigation by default – and can be liable for having done nothing to prevent a crime they ought to have acted to prevent. 

They risk up to 14 years in prison and an unlimited fine, as well as lesser impacts that are still quite serious, such as losing their client base and even their business.

The appropriate due diligence processes and the regulations are there to help prevent and obstruct organised crime and the horrible effects of it, but they're also there to protect the practitioner. 

Tim Pinkney is IFA Director of Professional Standards.

Join the upcoming IFA AML Matters webinars – a practical three-part series covering compliance reviews, policies and procedures, and risk assessments. Find out more.