- What is a Money Laundering Reporting Officer (MLRO)?
The MLRO is a nominated individual who will receive disclosures in respect of suspicions of money laundering and determine whether disclosure should be made to NCIS in accordance with the Regulations. In the case of a sole practitioner the practitioner will personally fulfil this role and will also comply with all other requirements of the Regulations.
- Do I have to carry out identification procedures for clients existing before 15 December 2007?
In addition to identifying and verifying the identity of new clients, the Regulations require that CDD and on-going monitoring measures are applied to existing customers on a risk sensitive basis. To this end, an assessment of the information already available on the customer file will be necessary. For customer relationships which commenced since the enactment of the previous 2003 Regulations (on 1 March 2004), one would expect the identification/verification evidence obtained under those Regulations to be sufficient, presuming there have not been significant changes since the information was collected. For customer relationships which predate the 2003 Regulations or in relation to which significant changes have taken place (e.g. ownership structure, location etc), CDD measures may need to be carried out in full. It would seem appropriate to undertake such measures at the planning stage of the next engagement for the customer.
- A former client has approached me to act for him again. Do I have to go through the identification procedures now?
Yes. You do need to carry out identification procedures for this client, even if you have previously identified him.
- Our firm offers potential new clients a free initial consultation. Do we have to carry out client identification procedures at this stage?
No. As the individual concerned is not yet a client there is no requirement to carry out client identification procedures. It is worth noting, however, that if you were to become aware of a suspicious transaction during the meeting then the firm should report this to SOCA, as such suspicions would be formed in the "course of business carried on" by relevant persons under the Regulations in the UK.
- I have been approached by a potential client who resides a distance from my office to provide tax advice. He does not plan to visit this area for a number of months. He has provided me with copies of his passport and some utility bills as evidence of identity. Is this sufficient?
No. Where a client is not being met face to face, there is a higher risk posed to the process of correctly identifying the client. Regulation 14 requires you to carry out enhanced CDD and on-going monitoring. In this case you could ask the client to take his original passport and utility bills to an appropriate independent individual such as another accountant, a solicitor, a member of the PSNI or a bank official and request that the latter copy the documents and certify that they are true copies of the original documents. You will need to consider in circumstances whether it is necessary to seek further evidence of the integrity and reputation of the certifying individual.
- I have been approached by a potential client who is resident outside of the United Kingdom to provide tax advice. How can I identify that individual?
Extra care is required in the carrying out of procedures to identify non-resident individuals. The same steps should be carried out as for a resident individual. If the potential client is non-resident in the UK he may provide identification documents which are unfamiliar to the firm. In these circumstances the firm should consider asking a respected firm of accountants or solicitors local to the potential client to assist with the verification of identity. For example where a firm is a member of an international network it may consider asking its network firm in the client's jurisdiction to assist.
The firm should additionally take care where the country of residence of the individual is one whose anti-money laundering regime is not similar to our own. The UK government may from time to time issue advisory notices listing countries with inadequate anti-money laundering strategies and any that have been categorised as having serious deficiencies. These are normally issued following quarterly Financial Action Task Force ("FATF") plenary meetings. Updates are posted on the Joint Money Laundering Steering Group ("JMLSG") website, www.jmlsg.org.uk, and the FSA website, www.fsa.gov.uk.
In all cases it is important to apply professional judgment as to whether sufficient information has been made available to be satisfied as to the identity of the potential client.
- I believe that the Regulations permit me to rely on other parties to obtain the CDD evidence required. If this is correct and can I do this in all cases? If so, that would result in significant savings in both time and money.
Regulation 17 permits 'relevant persons' to rely on certain other parties to apply the CDD measures. Reliance cannot be placed, however, on simply any third party. Paragraph (2) of the regulation specifically states the types of third parties which may be relied upon, which includes, for example, 'relevant persons' under the regulations who are auditors, insolvency practitioners, external accountants, tax advisers or independent legal professionals.
You should also note the following in relation to rely on specified third parties in relation to CDD measures:
- That third party must consent to be relied upon; and
- You still retain the responsibility under the regulations for the application of appropriate CDD measures and are liable for any failures in this regard
In practice, due to the exposure to additional risks arising from ceding full control over the application of CDD measures, practitioners may find that this provision is of limited use to them, as the additional risks may outweigh the benefits in terms of cost and employee time savings. If you decide to rely upon third parties with regard to any aspects of your CDD responsibilities, we would advise you to - Satisfy yourself as to the reliability and character of the third party upon whom you are proposing to rely; and
- At a minimum, request that the third party forward copies of any identification and verification data and other relevant documents on the identity of the customer and any beneficial owner obtained while applying the CDD measures.
- I am considering taking on a new audit client. As part of my standard acceptance procedures I send a professional enquiry letter to the potential client’s previous auditor. If I ask the previous auditor to confirm that his firm has carried out identification/verification procedures, and he does so, is that adequate to discharge my own obligations in this regard?
In effect what you propose to do is to rely on the previous auditor for the purposes of your CDD obligations under the Regulations. In the first instance, please refer to the response to the answer to question 8 in this regard.
Additionally, if you still propose to rely on the previous auditor, you need to consider whether any changes have taken place since the previous auditor carried out his CDD measures.
Furthermore, the inclusion of such a question in the professional enquiry letter can also potentially place the previous auditor in a difficult situation in the event that he has had reason to report a suspicion of money laundering to SOCA in respect of the client. In that event the previous auditor may be wary of giving rise to a "tipping off" offence through the communication of any issues to you. Section 333C of PoCA provides for an exception from the prohibition of disclosure of a report or an actual or contemplated investigation, where disclosure is between relevant professional advisers of the same professional standing (e.g.. subject to the same professional duties of confidentiality - for example accountant to accountant) for the purposes of preventing a money laundering offence. This would not necessarily include the disclosure that a report has been made to SOCA.
Thus, the fact that a response to a professional enquiry letter is silent on any reports to SOCA, cannot be construed to mean that no such issues exist.
Should you receive a professional enquiry letter which asks questions in relation to money laundering and a departing client, it is advisable to respond by saying that it is inappropriate for you to comment on that matter.
- Where can I find out more about carrying out identification and verification procedures for new clients?
CCAB has issued a comprehensive guidance document on the new regulations. It is available on under the Guidance and Procedures tab of this resource centre. Section 5 covers customer due diligence, while paragraphs 5.42 through 5.59 (as well as sections 5A and 5B) discuss the conduct of CDD in some detail.
- It has come to my attention that a client has understated his VAT liability on his VAT return. He assures me his intention is to amend the return and pay the outstanding amount to the Inland Revenue. Is this money laundering and do I need to make a report to SOCA?
The miscalculation of a VAT liability in error is not of itself money laundering. However if upon discovery of the error your client does nothing to rectify the situation then your client would be benefiting from the proceeds of criminal conduct and may be guilty of money laundering. If on the other hand the client rectifies the omission and pays the Inland Revenue what is owed then there will have been no benefit to the client and no crime of money-laundering. In deciding whether to report you must assess whether you have reasonable grounds for suspecting that money-laundering has occurred. Remember your client's assurances that he will take action to rectify are not the same as actual rectification.
My client has understated his VAT liability by £100. He tells me he is not going to bring this to the attention of the Inland Revenue as the amount is so small it is not worth the trouble. It is easier to keep the money. Should I report such a small incident?
There is no de-minimus level in the Regulations. You should report in this case. However you should be aware that SOCA has issued guidance in relation to the reporting of suspicions of money laundering which allows for an abbreviated report in the case of items of lesser intelligence value. This guidance and a suggested format for an abbreviated and full form are available on the SOCA website at http://www.soca.gov.uk/financialIntel/suspectActivity.html. You should read this guidance before deciding how to report in this case.
You should note that under s333D of POCA, 'relevant professional advisers do not commit the offence of "Tipping Off" if he makes a disclosure to his client for the purpose of dissuading the client from engaging in conduct amounting to an offence. It would therefore seem prudent to attempt to persuade your client that he should resolve the issue to avoid you having to make a report to SOCA. In doing so, however, you need to be cautious, as if you cannot justify the disclosure in terms of attempting to dissuade your client from committing an offence, you may become liable for a tipping off offence yourself.
- A client has asked me to process a transaction through the firm’s client account and I have reasonable grounds for suspecting that this transaction may be part of a money-laundering transaction. I have reported this to SOCA but am unsure how to proceed. If I tell the client that I refuse to process the transaction, I may tip him off, but if I go ahead with the transaction, I run the risk of committing a money laundering offence myself. What should I do?
The PoCA in s.336 is clear in its answer to this question. Your report to SOCA should have included the request for consent to proceed with the transaction. Having made the report to SOCA, you should wait for a period of seven working days (excluding bank holidays and weekends), starting from the day after you have made the report, to receive either consent from SOCA to go ahead with the transaction or a refusal of such consent. If by the end of the seven working days you have not had a refusal of consent from SOCA you can go ahead with the transaction. If SOCA has issued a refusal of consent within the seven days then the transaction may not legally be processed by you until a moratorium period of 31 days from the date consent was denied (note this is calendar days and not working days) has expired. In the event of the latter the transaction may be processed by you after the expiration of the moratorium period unless SOCA has taken action such as seeking a court order to restrain the assets in question.
In a recent review of the operations and procedures of SOCA by Sir Stephen Landers, it has been established that SOCA is obliged to continuously review the situation regarding a report where consent to carry out a particular transaction has been denied. In such circumstances, where SOCA identifies that the reason for withholding consent is no longer justified, then SOCA must them give consent, irrespective of whether or not the moratorium period has expired
SOCA has undertaken to treat all requests for appropriate consent as a priority. Reporters should ensure that they tick the "consent required" option on the standard SAR form (on-line or otherwise). Obviously, if you are concerned about the delay in carrying out the transaction, reporting via SOCA is the quickest and most time efficient way of making the report. Reports can also be faxed to SOCA at Hardcopy consent requests should be faxed to 0207 238 8286. In such circumstances, it would not be advisable submit a report via the postal system.
You should take care to avoid providing the client with any information which could indicate that you have reported, or are intending to report, your suspicions to SOCA, as this could constitute a "tipping off" offence. If possible, you should try to explain to your client that any delays are caused by your normal client procedures in dealing with transactions via client accounts held by the firm.
- I run a small practice and sometimes use staff from agencies or subcontractors during busy periods. Do I have to make sure that they are suitably trained in money laundering issues?
The simple answer is yes. Regulation 21 requires 'relevant persons' to take appropriate measures so that all relevant employees of his are made aware of the law relating to money laundering and terrorist financing are regularly given training in how to recognize and deal with transactions and other activities which may be related to money laundering or terrorist financing. Whilst 'relevant employees' is not specifically defined in the Regulations, it would not be prudent to deal with the abovementioned agency staff or subcontractors in a manner other than as normal employees of your firm. To do so could result in your firm being held liable for failure to provide training in accordance with the Regulations.
Not only will you have to ensure that they are trained in and aware of your firm's own procedures but you should ensure that they understand what money laundering is and how to identify it. You should ascertain what training they have had and whether there is adequate proof that this has been undertaken. In particular you should ensure that the individual's training has been recent. Always ask individuals who are new to the firm of their experience in this area and if necessary arrange training for them, whether it be by external or internal courses or online training. Whatever the training, remember to retain evidence of this.
- I have been approached by a potential client with regard to certain tax matters. He has informed me that he has not fully complied with legislation in relation to income tax and has requested assistance in establishing the quantum of his exposure and regularising his tax affairs. He intends to make a voluntary disclosure to HMRC once he has established the outstanding liability. I understand that benefitting from the proceeds of tax evasion is captured under the definition of money-laundering. As a result of the information I have received from this potential client, am I obliged to make a report to SOCA?
Since 21 February 2006, where a relevant professional adviser (defined as an accountant, auditor, or tax adviser who is a member of a professional body which tests applicants for membership for competency, imposes and maintains professional and ethical standards for its members and sanctions non-compliance with those standards) obtains knowledge or suspicion of money laundering offences in privileged circumstances, he is exempted from the obligation to report. The Privilege Reporting Exemption is contained in section 330(6) of the PoCA. Not all relevant persons are relevant professional advisers. You as a member of the ICAI are, however, within the scope of the exemptions.
Section 7 of the CCAB guidance (available in Guidance and Procedures tab) discusses the two types of privileged circumstances, namely legal advice and litigation. The legislation sets out the specific conditions under which the exemption would apply in each case (see paragraphs 7.34 and 7.35 of the CCAB guidance). The circumstances you find yourself in relate to "legal advice", namely that your client is attempting to ascertain his legal position vis-à-vis his rights, liabilities and obligations or remedies under the law.
A clear understanding of whether or not the Privilege Reporting Exemption applies to your situation is very important. If it does, then you are precluded from submitting a Suspicious Activity Report (SAR) to SOCA. To do so in such circumstances could expose you to liability in relation to your professional confidentiality obligations. If you are in any doubt as to whether the exemption applies, we would advise you to obtain legal advice.
The legislation includes a crime/fraud exception which overrides the Privilege Reporting Exemption, i.e. it does not apply to a communication which is made for the purpose of furthering a criminal purpose. If you believe that the disclosures made to you were for such a purpose, and as a result of the information you received, you know or suspect money laundering offences have taken place, you must submit a SAR.
You will need to monitor the situation closely to ascertain whether the client is actually regularising his tax affairs and whether he makes an appropriate disclosure in a timely manner once his legal position has been ascertained. If this is not the case, then you should seek legal advice, as it would seem that the circumstances may no longer support the application of the exemption and you may well be obliged to report in such circumstances.
- In response to questions I asked during an audit, I was informed that the company has offshore accounts containing proceeds from business transactions which have not been declared for tax purposes. I challenged the CEO about these accounts and he stated that they were actually private rather than business funds and that they were held in business accounts simply for ease of administration. He admitted, however, that the funds remained undeclared for tax purposes. He also said that he was aware of the increasing practice in the accountancy profession of making reports to various authorities and that if I was considering such action, the company would sue me for breach of professional confidentiality, as the information was privileged by virtue of the fact that it was gained during the course of a statutory audit. I am unsure about my legal position; am I obliged to make a report to SOCA? If indeed they are private rather than business funds, does this obviate any reporting obligations I might otherwise have? If I do report, am I exposing myself to the risk of being sued by my client? Is there anything else I need to consider in this regard?
There are a number of issues which need to be clarified in your query.
Firstly, the Privilege Reporting Exemption, contained in s. 330(6) of the PoCA, does not apply to information gained in the course of an audit. If you have knowledge or suspicion of money laundering offences arising from information you have gained during an audit, you are obliged under s. 337 of the PoCA to report that knowledge or suspicion to SOCA. You are protected under the legislation against allegations of breach of confidentiality.
Secondly, the disclosure requirement under s. 337 of PoCA relates to information coming to a person in the course of business in the regulated sector, and not just information relating to clients and their affairs. Therefore, the suggestion that the funds are private and do not relate to the business does not negate your obligation to report.
Finally, given the circumstances you have discovered, you should consider whether to resign your position as auditor of the company under the Code of Ethics for members. Section 210 of the code discusses threats to the integrity and professional behaviour of an accountant in public practice and considers the impact of the illegal behaviour of a client in the decision as to whether or not to accept an engagement. Similar considerations would be appropriate in deciding whether or not to continue an engagement having discovered such illegal activity. You should refer to section 9 of the CCAB guidance (available in the Guidance and Procedures tab). This discusses issues with regard to balancing professional work with PoCA requirements. In particular, paragraphs 9.8 and 9.9 caution against inadvertently "tipping off" when resigning, either in communication with the client or in the statements to be filed at Companies House. The CCAB guidance advises obtaining independent legal advice.
- I have been engaged by a solicitor in a divorce case to investigate the financial affairs of one of the parties. During the course of the investigation I have discovered off-shore accounts and have reason to believe the accounts contain funds which have not been declared to HMRC. I understand that there is a exemption under the Proceeds of Crime Act 2002 which exempts me from reporting in circumstances where the information was gained in relation to litigation. I am unsure, however, whether the exemption applies in this case, as I was engaged by the solicitor and not by the client. Can you please advise me of my position with regard to the exemption?
One of the privileged circumstances within the Privilege Reporting Exemption, contained in the PoCA, is the area of litigation (see section 330(1)(c)). Section 7, paragraphs 7.26 through 7.46 of the CCAB Guidance (available in the Guidance and Procedures tab) discuss the Privilege Reporting Exemption.
It does not matter that the solicitor engaged you rather than the client directly, as the information relating to the suspicion/knowledge of a money laundering offence is gained via confidential communication with the client or a third party, in this case the client's solicitor.
Paragraph 7.35 of the CCAB guidance notes that in order for the exemption to apply, the confidential communication must also have been made for the dominant or overriding purpose of being used in connection with actual, pending or contemplated litigation, with regard to the offence. It further notes that defining contemplated litigation is difficult and it will usually be necessary to be able to show that litigation is a real likelihood rather than a mere possibility.
You should obtain independent legal advice on the applicability of the exemption in the circumstances you describe.
- Should I draw my clients’ attention to my obligations under the Regulations by including an additional paragraph in my engagement letter?
It will be useful to draw clients' attention to the new Regulations and the engagement letter is one way of doing this. It may be helpful for the auditors to explain to their client the reason for requiring evidence of identity and this can be achieved by including an additional paragraph in the engagement letter. The following is an illustrative paragraph that could be included in the engagement letter for this purpose:
As with other professional services firms, we are under stringent requirements to identify our clients for the purposes of the anti-money laundering legislation. We are likely to request from you, and retain, some information and documentation for these purposes and/or to make searches of appropriate databases. If satisfactory evidence of your identify is not provided within a reasonable time, there may be circumstances in which we are not able to proceed with the appointment."
It may also be helpful to inform clients of the accountants'/auditors'/tax advisers' responsibilities under PoCA to report knowledge or suspicion, or reasonable grounds to know or suspect, that a money laundering offence has been committed and the restrictions created by the tipping off rules on the ability to discuss such matters with clients, although it is not necessary to do so. The following is an illustrative paragraph that could be included in the engagement letter for this purpose:
"Money laundering reporting
The provision of [audit, tax / other accountancy-related services] is a business in the regulated sector under the Proceeds of Crime Act 2002 and, as such, partners and staff in accountancy/audit firms are required to report all knowledge or suspicion, or reasonable grounds to know or suspect, that a criminal offence giving rise to any direct or indirect benefit from criminal conduct has been committed, regardless of whether that offence has been committed by their client or by a third party. If as part of our normal work we have knowledge or suspicion, or have reasonable grounds to know or suspect, that such offences have been committed we are required to make a report to the Serious Organised Crime Agency (SOCA). In such circumstances it is not our practice to discuss such reports with you because of the restrictions imposed by the tipping off provisions of the anti-money laundering legislation."
Whether or not to include these illustrative paragraphs in the engagement letter is a policy decision to be taken by individual firms to be applied on all engagements, irrespective of particular client situations. Unless the policy is applied in a consistent manner inclusion of these paragraphs might be interpreted by law enforcement as "tipping off".