AML risk and the risk-based approach
Money laundering underpins and enables most forms of organised crime, allowing crime groups to further their operations and conceal their assets. The National Crime Agency (NCA) believes that there is a realistic possibility that money laundering is in the hundreds of billions of pounds annually.
IFA members play an essential role in protecting the financial system and other sectors from misuse by criminals and terrorists by understanding the money laundering and terrorist financing risks, meeting regulatory obligations and encouraging compliance and good practices to mitigate these risks.
All firms that are within scope of The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (as amended) (the regulations) must comply with the all the requirements of these regulations.
As required by regulation 18, firms must conduct a firm-wide money laundering/terrorist financing risk assessment. This includes taking appropriate steps to identify, assess and mitigate money laundering or terrorist financing.
The firm risk assessment must be documented. As an AML supervisor, the IFA may request to see your firm’s risk assessment as part of the membership renewals process and AML monitoring visits.
How to undertake a firm-wide risk assessment
The steps that should be undertaken a firm’s risk assessment are as follows:
- Identify the money laundering risks that your firm faces from your clients, the services you provide, the geographic areas you operate in, the firm’s transactions and how your services are delivered.
- Assess each identified risk by considering the likelihood of it occurring and the potential impact.
- Implement appropriate policies, procedures and controls to mitigate the risks.
Risk assessments must take into account the information that is publicly available, in particular The National Risk Assessment (NRA) of Money Laundering and Terrorist Financing 2020, the Accountancy AML Supervisors’ Group (AASG) risk outlook and AML alerts issued by the IFA.
The risk of money laundering and terrorist financing is constantly evolving. Firms should regularly review this webpage to make sure they have identified all the areas relevant to their own business.
Section 4 of the Anti-Money Laundering and Counter-Terrorist Financing Guidance for the Accountancy Sector has further guidance on the risk-based approach and conducting risk assessments.
National risk assessment of money laundering and terrorist financing 2020
The National Risk Assessment (NRA) of Money Laundering and Terrorist Financing sets out the key money laundering and terrorist financing risks for the UK. The NRA concludes that the risk that accountancy service providers could be used to facilitate money laundering is considered high. The risk that accountancy service providers could be abused by terrorists is considered low.
Accountancy services remain attractive to criminals due to the ability to use them to help their funds gain legitimacy and respectability, as implied by accountants professionally qualified status.
Some services provided by accountants are at higher risk than others. Those most at risk are:
- Company formation and termination
- Mainstream accounting
In addition, the NRA states that the risk is highest when accountants do not fully understand the money laundering risks and do not implement appropriate risk-based controls, particularly where accountants fail to register with a supervisor. The AASG risk outlook provides further guidance and red flag indicators on each of these risk areas.
AASG risk outlook
The Accountancy AML Supervisors’ Group has set out in their guidance the key risks and red flag indicators the AASG consider are relevant to the accountancy sector. The AASG will update it on a regular basis, reflecting the UK’s National Risk Assessment and other emerging threats and trends.
Firms should regularly review this risk outlook to make sure they have identified all the areas relevant to their own business – particularly as the risk may evolve because of changes to the firm’s client base, geography and services provided.
Services that are identified as higher risk in the AASG risk outlook are:
- Trust and company formation services (TCSP): can be used to enable the laundering of millions of pounds, conceal the ownership of criminal assets and facilitate the movement of money to secrecy jurisdictions. The risk is highest when coupled with other high-risk services or high-risk factors, such as a client in a high-risk country. Further guidance on understanding TCSP risks is available.
- Accountancy and bookkeeping services: Criminals will falsify underlying books and records to hide criminal activity and engage a professional accountant to prepare the financial statements to legitimise them and benefit from the veneer of respectability provided by the professional adviser. There is also a risk associated with ‘incomplete records’ engagements where the accountancy firm, or bookkeeper, is asked to use bank statements to prepare the accounts and not the underlying books and records. This is another way in which the criminal can mask the true nature of the transactions.
- Payroll services: Payroll services may include the handling of clients’ funds and so the accountant may provide services that legitimise the proceeds of a crime e.g, modern slavery, ghost employees or individuals recorded as an employee who aren’t performing tasks. The accountant may also legitimise the incorrect calculation of deductions (tax evasion) by processing payments – and so they need to be careful about the accuracy and fairness of the calculations. The NCA has published indicators of modern slavery and human trafficking in the accountancy sector. This provides red flag indicators to be aware of during payroll engagements. The risk is highest where staff have not received AML training tailored to payroll services, staff are not client-facing or there is poor quality information provided by the client.
- Tax advice: There will be many circumstances where providing tax advice to reduce a tax liability is legal. However, there is a risk that an accountant or tax adviser may provide tax advice that assists the client in masking their true income, or structuring their income and wealth to gain an illegal tax advantage.
Clients which are regarded in the AASG risk outlook as higher risk include:
- Clients seeking anonymity or undue secrecy
- Clients with a history of criminal activity
- New clients outside of your normal client base
- New clients – professional advisors
- Politically exposed persons
- Cash-based businesses
- Other sectors highlighted by the NRA e.g. arms dealers, property transactions with unclear source of funds, transport/logistics businesses, legal services, art market participants and financial services
- Clients with a changing business, or involved in emerging sectors
- High net worth individuals
International money laundering risks must also be taken into account as part of the firm risk assessment:
- Countries that do not have effective anti-money laundering regimes
- Countries with significant levels of corruption
- Countries with organisations subject to sanctions
Further information is included in the AASG risk outlook.
The COVID pandemic has also led to an increase in the delivery of services via remote methods (cloud accounting platforms). Firms should consider whether this new delivery mechanism or the use of a new technology to the firm has resulted in higher risk to their practice
Criminals are experts at impersonating people, organisations and the police. Accountants should also be aware of COVID-19 19 related fraud such as:
- The sale of fake testing kits and PPE.
- Appeals to support bogus charities.
- Frauds targeting government financial support schemes.
Trade-based money laundering
Trade-based money laundering is the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illegal origins or finance their activities. Given economic conditions, firm’s exposure to trade based money laundering may increase.
The Financial Action Task Force (FATF) Best Practices on Trade Based Money Laundering and the National Strategic Assessment of Serious and Organised Crime 2020 includes further information and red flags on trade based money laundering.
Chinese underground banking
Driven, at least in part, by the Chinese government’s policy and regulations regarding personal foreign exchange transactions and the removal of capital from China, Chinese underground banking provides a money laundering method for criminals to wash their dirty money without any funds being transferred from one country to another.
Firms with Chinese clients need to be alert to the risk of handling or facilitating handling the proceeds of crime. Further information is available in the NCA publication on Chinese Underground Banking and 'Daigou
Bribery and Corruption Risks to UK Independent Schools – Case Studies and Red Flags
The National Economic Crime Centre Amber alert Bribery and Corruption Risks to UK Independent schools – Case Studies and Red Flags. This alert provides information on the bribery and corruption risks that independent schools may be exposed to in the UK.
Additionally, through review of anonymised case studies, this alert details a number of red flags which may help identify higher risk transactions through independent school accounts. These might include school fees being paid by third parties on behalf of parents, students who come from higher risk jurisdictions, cash deposits to pay school fees, payments out of custody accounts and large deposits of payments of fees in advance.
The IFA, as part of the AASG, sends AML alerts to the Money Laundering Reporting Officer (MLRO)/ single point of contact of the firm. These alerts can be found here and are very confidential and must not be shared. If you have any queries or feedback on the alerts, please email [email protected]