Red flags - What to look out for in AML

Anti-money laundering “red flags" - training material

Chartered Accountants Ireland as part of a joint practice group with GNECB  and the Garda Financial Intelligence Unit, ACCA, Institute of Certified Public Accountants of Ireland, Association of International Accountants and Chartered Institute of Management Accountants is pleased to have been involved in producing training material to assist professional accountants and their staff. Please find attached  an open-source document that may be used by any person for the purposes of assisting in understanding the requirements of the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 to 2021 and to help identify potential money laundering risks with clients.

The document has had a few updates since first publication. In August changes were made:

• To reflect that section 1079 Taxes Consolidation Act 1997 applies to both auditors and to tax advisers;
• To clarify on reporting obligations under sections 42 Criminal Justice (Money Laundering and Terrorist Financing) Act 2010, section 19 Criminal Justice Act 2011 and section 59 of the Criminal Justice (Theft and Fraud Offences) Act 2001 ;
• To clarify use of words speculation/professional scepticism and suspicion.
• To expand references to reporting requirements when there is failure to keep adequate accounting records (see Appendix 4 of updated document).

In September some further  amendments were made mainly to provide an explanation of the use of the word “fungible “ in case study 7,to ensure correct reference to “FIU Ireland” and “suspicious transaction reports” throughout the document and to reference a threshold for suspicion being reached (rather than breached ).

Due diligence case studies Consultative Committee of Accountancy Bodies (CCAB) 

CCAB is an umbrella group of chartered professional bodies in the UK of which Chartered Accountants Ireland is a member. In July 2022 CCAB published a number of helpful client due diligence case studies.

• Case study 1 -High Risk jurisdiction
• Case Study 2 – Varying CDD based on level of risk
• Case Study 3 – Change in client circumstances
• Case Study 4 – An offer that’s too good to refuse

The case studies provide different scenarios and consider certain questions in each such as what were the red flags to pick up? What are the risks and the potential threats the firm faces or may face? What action(s) should be or should have been taken?

Financial Conduct Authority

In 2020 the UK Financial Conduct Authority (FCA) imposed a hefty fine for bond transactions which were arranged involving clients and counterparties in jurisdictions with higher financial crime risk. The fines were imposed for breaches of a number of FCA and PRA principles and rules. The FCA said there were several red flags, none of which were especially hard to spot:

• They were very large transactions compressed into tight timetables.
• They involved jurisdictions which the arranger already considered had high risks.
• The arranger possessed information about a third party whom they considered was high risk and who was said to be closely associated with the transactions.

The FCA found these risks were not adequately explored or considered holistically when approving the transactions.

FATF Guidance

FATF has produced useful Guidance on Trade Based Money Laundering Risk Indicators which should be consulted when considering red flags and risk indicators.

Other

The material below is drawn mainly from UK sources .It is provided for readers for illustrative purposes  and Irish readers in particular must use this material subject to this limitation .

A presentation to Professional Standards by the UK Metropolitan Police on key crime indicators within the accountancy sector provided information based on real-life investigations. It focussed on red flags that accountants may come across when reviewing accounting records which may in certain circumstances raise suspicion. These included lacks of sales records, income received at odd times of day, lack of assets, lack of staff costs and loans. Here is a  useful summary of crime indicators prepared by them giving  more information. 

Caselaw has also provided some guidance on red flags and below is a summary of a couple of cases which considered the topic.

In a UK case in 2006 ¹ a solicitor was approached to effect a conveyance for the family of two individuals who were dealers in drugs. He knew enough about local prices to appreciate that the transaction was at a substantial undervalue. The judge found him guilty of failing to make a required disclosure to the authorities, having reasonable grounds for knowing or suspecting that other persons were engaged in money laundering. The judge said he closed his eyes to what would otherwise have been the clearest of evidence staring him in the face. He received a 15 month prison sentence which was reduced to 6 months on appeal.

In another UK case, which involved a financial institution ² the judge at first instance pointed to a number of red flags which the defendants should have recognised. They were well aware of the plaintiffs’ dire financial straits, there was plenty of evidence to put them on notice that something was seriously wrong, for example, the unexplained appearance of a very large sum of money into the account shortly after other accounts were frozen. Contracts and questionable paperwork were produced which had not been heard of previously to justify payments out of the account. The defendants proceeded, notwithstanding obvious oddities and inconsistencies between the contracts and what they had previously been told. The defendants were found negligent and ordered to pay damages. The case was later appealed to the supreme court but the lower court’s decision was upheld.

1.R v Griffiths & Pattison [2006] EWCA Crim 2155

2.Singularis Holdings Limited (in official liquidation)v Daiwa Capital Markets Europe Ltd[2017] EWHC 257 (Ch) 

What should the practitioner look out for?

The practitioner should consider the following circumstances:

• activities which have no apparent purpose, or which make no obvious economic sense (including where a person makes an unusual loss), or which involve apparently unnecessary complexity;
• the use of non-resident accounts, companies or structures in circumstances where the client’s needs do not appear to support such economic requirements;
• undue client secrecy (e.g. reluctance to provide requested information such as identity documents) ;
• unnecessarily complex ownership structures (including nominee shareholders or bearer shares), purchases in someone else’s name or last minute substitution of a purchasing party’s name ;
• business activities: cash-based businesses; high value goods such as high-end cars, watches etc., money service bureaux; arms dealers;
• property transactions with unclear source of funds;
• new clients carrying out one-off transactions;
• unusual or changing instructions;
• rapid rate of turnover (i.e. trade for a short period of time, close down and then a start up as a new company);
• where speed is more important than costs; unusual retainer or where the client is prepared to pay substantially higher fees than usual without legitimate reasons;
• where the client is taking on work which is outside its normal range of goods and services;
• clients that are involved in transactions that do not make commercial or economic sense or are involved in transactions where the source or level of funds is unusual or unknown;
• high net worth individuals; uncooperative clients;
• foreign and domestic politically exposed persons;
• clients who have known criminal convictions relating to the proceeds of crime or are on a terrorist list;
• the client’s lifestyle and/or transactions are inconsistent with known business and personal information;
• the client has multiple bank accounts or foreign accounts with no good reason; and
• the client has changed professional advisors a number of times in a short space of time without legitimate reasons.

These pages are provided as resources and information only and nothing in these pages purports to provide professional or legal advice or definitive legal interpretation(s) or opinion(s) on the applicable legislation or legal or other matters referred to in the pages. If the reader is in doubt on any matter in this complex area further legal or other advice must be obtained. While every reasonable care has been taken by the Institute in the preparation of these pages, we do not guarantee the accuracy or veracity of any resource, guidance, information or opinion, or the appropriateness, suitability or applicability of any practice or procedure contained therein. The Institute is not responsible for any errors or omissions or for the results obtained from the use of the resources or information contained in these pages.