Money laundering: 4 signs to watch for

Money laundering in business does happen, says Tamara Howe, Director and Money Laundering Reporting Officer at chartered accountancy firm HW Fisher LLP. And accountants are in a unique position to identify it, with in-depth client relationships allowing a point of view that goes beyond transaction monitoring, and deeper into a client’s business activities and beneficial ownership.

The crimes behind money laundering are concerning. But accounting firms should be just as concerned about whether they have rigorous client due diligence processes. There is not only reputation at stake, there are legal and regulatory risks to consider alongside financial penalties.

“Screening our clients, especially those assessed as high risk, is imperative to ensure we are on-boarding the appropriate clientele and preventing criminal proceeds from being used within the UK’s economy,” Howe says. “Everybody in the firm has an obligation to make Suspicious Activity Reports (SARs).”

Every business within the regulated financial services sector should have a Money Laundering Reporting Officer (MLRO). They should be the first person contacted when any of the above signs, or any other hints of money laundering, are encountered by any staff member.

Staff who think a client is potentially acting with criminal intent and a proceed of crime has been generated must submit an internal SAR, Howe explains.

“The MLRO will then determine whether a report must be submitted to the National Crime Agency, and whether the firm wishes to continue a business relationship with the client.”

There are many signs to look out for when it comes to ensuring you and your clients are on the right side of the law, Howe says. It is important to be aware of various indicators that can help you ensure compliance with the law. Here are Howe’s top four indicators.

1 A Russian connection

Accounting services are restricted in the UK for people who are connected to Russia.

Originally, the rules only applied to sanctioned individuals. But as of 21 July 2022, the provision of accounting, business and management consultancy to “a person connected with Russia” has been prohibited. As of December 2022, auditing services joined this list.

All accountants, then, must check their client portfolios to ensure there are no potential exposures to those who fall within this definition.

“In an attempt to circumvent these rules, clients could possibly use a secondary passport (if they have dual nationality) or move jurisdiction (or claim they have moved jurisdiction,” Howe says, explaining that people may also transfer or dilute shares to obscure ownership of entities.

“Accountants must consider who is actually the true, beneficial owner,” she says.

“The responsibility of firms to identify Russian connections is essential to comply with legislation. Managing the challenge is very much about conducting ongoing monitoring and how well you know your client.”

2 Unregistered overseas entities

All overseas entities that own UK property must be on the Register of Overseas Entities. The Economic Crime Act 2022 set the legislation for the register, which came into force on 1 August 2022, and its purpose is to help the government tackle global economic crime.

And yet, thousands of businesses remain unregistered, Howe says.

“Any overseas entity that owns (and in some cases leases) UK property must disclose their beneficial owners to Companies House,” she says.

“The deadline for registration was 31 January 2023. But there are thousands of companies that have not disclosed who their beneficial owners are.

“If you have overseas clients who own UK property, have they registered and disclosed who their beneficial owners are? If not, you should inform your client of their obligations to register. If there is resistance, this could be seen as a red flag and a matter to discuss with your MLRO.”

3 Change of business purpose

As we continue to make our way out of the pandemic, many businesses have gone through some sort of change in direction.

For some, it’s about technological transformation. For others, it’s a new line of products or services. Then there are businesses that have made seemingly inexplicable commercial changes.

“For example, imagine you represent a business that was focussed on real estate ownership within the UK, and suddenly they state a change in the nature of business to jewellery importation from Turkey,” Howe says.

To help ascertain whether this change is genuine or whether there might be something else going on, Howe suggests asking yourself questions about the change. For the example above, Howe’s questions include:

• Does it make commercial sense that they would be importing goods from Turkey, which is a high risk country as stated in Schedule 3ZA of the Money Laundering Regulations (MLR)?
• Do they have the expertise/contacts to be able to conduct this new business?
• Does the information they’re giving you seem viable?
• Are there supporting documents and contracts in place to support their statements?

“This is all about how well you know your client,” Howe says. “If it appears suspicious, further investigation would be required.”

4 Politically exposed person

The MLR defines a politically exposed person (PEP) as “an individual who is entrusted with prominent public functions, other than as a middle-ranking or more junior official”. The PEP designation is also extended to those individuals’ family members and close associates.

“There’s good reason, within our regulations, why we must conduct enhanced due diligence on PEPs,” Howe says.

She outlines easily identifiable warning signs including:

• Connection to countries known for low levels of democracy
• Connection to countries known for high levels of bribery and corruption
• Those in higher-risk industries such as mining and natural resources

“In these instances, a detailed understanding of the source of wealth is necessary. It is important that this information makes commercial sense and can be verified,”Howe says.

But those simple warning signs are not the sole indicators, she warns: “UK PEPs also present a significant level of risk. They hold roles of prominence and influential seniority within society. Scrutiny should also be applied to these relationships.”

Effective client due diligence processes, supported by adverse media screening and ongoing monitoring, are all vital to the safeguarding of our firms and accountancy sector. This ultimately helps ensure the prevention of money laundering within the UK.

The IFA’s AML Matters webinars help build understanding of anti-money laundering requirements for members and accounting professionals. Find out more and register.