The accountant and the fight against money laundering

1. Opening title slide. Highlight and overwrite dummy title. Restrict yourself to a maximum of 3 lines. This text is set to align at the bottom. Do not change the fonts or sizes used. The accountant and the fight against money laundering Date : July 2006 Speaker : John Davies Head of Business Law ACCA (London)

2. Money laundering is the process whereby criminals attempt to conceal the true origin and ownership of the proceeds of their criminal operations What is money laundering?

3. Highlight and overwrite dummy text with your titles and texts. Restrict yourself to a maximum of 6 points per slide. If you require more points on a specific topic use as many following slides as necessary. Do not change the fonts or sizes used in the blanks. If you require more of any slide, go to the ‘Slide Sorter View’, click on the required slide and hit ‘Control D’, this can be repeated to create as many duplicates as required. The object of anti-money laundering (AML) controls To discourage criminal activity by ensuring that criminals who try to use the financial system for laundering the financial proceeds of their crimes can be identified and their funds confiscated

4. Highlight and overwrite dummy text with your titles and texts. Restrict yourself to a maximum of 6 points per slide. If you require more points on a specific topic use as many following slides as necessary. Do not change the fonts or sizes used in the blanks. If you require more of any slide, go to the ‘Slide Sorter View’, click on the required slide and hit ‘Control D’, this can be repeated to create as many duplicates as required. Possible warning signs of money laundering activity Unusually large deposits of cash made by an individual or company whose affairs would normally generate deposits by cheque or bankers’ draft Substantial increases in cash deposits without apparent cause Customers depositing large numbers of smaller cash amounts which together make up a substantial sum Reluctance by a customer to provide routine information when opening an account; providing information which is difficult or expensive to verify Large cash withdrawals from a hitherto dormant/inactive account

5. World-wide money laundering could amount to 2 – 5% global GDP ($590 billion - $1.5 trillion) (IMF) • £25 billion of criminal assets are laundered through the UK financial system every year (UK Govt estimate) • $3.5 billion is laundered though the Australian financial system each year (AUSTRAC estimate) The global scale of money laundering

6. Most national governments have signed up to international AML conventions so are obliged to implement international norms If lenders feel that a country’s AML controls are defective this could affect availability and cost of lending to that country • Countries do not want to give out the message that crime pays • National financial infrastructures have a direct interest in preserving their reputation for sound finances Why are AML controls important?

7. Use as section divider or to punch home a particular concept. Size and crop photo to fit entire slide frame. Right mouse click on photo and choose ‘order’ then ‘send to back’. The photo will then sit behind the pre-animated keylines and text block. Overwrite the text with a suitable title i.e. ‘Networking’ For detailed instructions on how to import, position and resize photos, please see the PowerPoint show entitled ‘Photo placement guidelines.ppt’ The Financial Action Task Force (FATF) www.fatf-gafi.org

8. Monitors developments in money laundering techniques Conducts evaluations of individual countries’ AML controls Issues detailed recommendations for AML controls Remit now covers terrorist financing The role of FATF

9. ‘We have observed an increasing tendency for professional service providers, such as accountants, solicitors, company formation agents and other similar professionals, to be associated with more complex money laundering operations.’ FATF finding, 1999

10. They should take steps to establish the identity of their clients (client due diligence – CDD – procedures) They should keep records of their CDD data for 5 years They should adopt internal programmes for guarding against money laundering and terrorist financing • They should be required by law to report to designated authorities where they suspect or have reasonable grounds for suspecting that funds are the proceeds of money laundering or terrorist financing FATF recommendations for accountants

11. The source of global rules on money laundering Financial Action Task Force (FATF) recommendations Australia Law AUSTRAC rules EU law UK law NZ Law Police guidance Professional guidance for accountants

12. Use as section divider or to punch home a particular concept. Size and crop photo to fit entire slide frame. Right mouse click on photo and choose ‘order’ then ‘send to back’. The photo will then sit behind the pre-animated keylines and text block. Overwrite the text with a suitable title i.e. ‘Expand your horizons’ For detailed instructions on how to import, position and resize photos, please see the PowerPoint show entitled ‘Photo placement guidelines.ppt’ Money Laundering - ACCA guidance

13. • Applies to members world-wide Para 4 – members should be aware of their obligations under local law Para 6 – member firms should establish in-house policies and practices and ensure their staff are properly trained on AML issues Para 8 – member firms should carry out CDD checks when a prospective client approaches it You must obtain independent advice of the client’s identity, e.g. passport and proof of address Where the company is a company you should - obtain proof of corporate status - establish the company’s business and registered address - establish the structure, management and ownership of the company - establish the identity/authority of those who are instructing you • You must establish precisely what the new client is asking you to do IF YOU CAN’T ESTABLISH IDENTITY DON’T WORK FOR THE NEW CLIENT! Para 19-21 – where you know or suspect that funds derive from crime, report your suspicions to the relevant national authority (where one exists) ACCA statement 3.8 on money laundering

14. What is suspicion? ‘Suspicion is more than speculation but falling short of proof based on firm evidence. A particular set of circumstances which may be suspicious in relation to one client may not be suspicious in relation to another client. Therefore the key to recognising a suspicious transaction is for members to have sufficient understanding of clients and their activities.’ ACCA statement 3.8 on money laundering (contd)

15. You know your long-standing client enjoys occasional private (and legal) gambling. His record is unexceptional. One day you see him driving an expensive new sports car which would normally be beyond his means. As far as you can tell his business is proceeding as normal. Provided you are satisfied that your client is an honest person and is telling the truth, there is nothing here that should necessarily cause you to suspect that your client is dealing in the proceeds of crime. Should you suspect? (1)

16. Your client runs a restaurant. On checking the accounting records of the company in the course of preparing its annual accounts, you notice that there is a very significant rise in the amount of cash takings over the previous year which seems to you unusual and difficult to explain given your understanding of the performance of similar businesses. You further find that a number of invoices appear to be made out to companies which, on further examination, do not appear to exist. Your client is unable to answer your queries to your satisfaction. These details may give you cause to suspect that your client is dealing with the proceeds of crime. Should you suspect? (2)

17. You are aware that a new client’s business has made large taxable profits over a period of time. You come across information which reveals that information presented to the tax authorities in the past has substantially underestimated the taxable profits and hence the company’s tax liability. This gives you evidence which should cause you to suspect that your client is dealing with the proceeds of a crime. Should you suspect? (3)

18. ACCA Technical Fact Sheet 94 (accountants’ AML responsibilities in the UK -www.accaglobal.com/transparency/money laundering) Don’t tip off your client that you have reported him But advising a client not to break the law does not constitute tipping off

19. Use as section divider or to punch home a particular concept. Size and crop photo to fit entire slide frame. Right mouse click on photo and choose ‘order’ then ‘send to back’. The photo will then sit behind the pre-animated keylines and text block. Overwrite the text with a suitable title i.e. ‘Expand your horizons’ For detailed instructions on how to import, position and resize photos, please see the PowerPoint show entitled ‘Photo placement guidelines.ppt’ Money Laundering – European legislation

20. Auditors, external accountants and tax advisers Notaries and other legal professionals Trust and company service providers Real estate agents Natural and legal persons who trade in goods where they are sold to one client for 15,000 euros or more (either in one or a series of transactions) EU Second Directive – obligations imposed on (among others)

21. Internal procedures – firms must put in place adequate and appropriate procedures for record keeping, internal control, risk assessment, risk management and communication designed to forestall and prevent money laundering or terrorist financing CDD checks – firms must verify clients’ identity by reference to documents, data or information obtained from a reliable and independent source Reporting of suspicions – member states should establish financial intelligence units and require regulated persons to report to them where they know, suspect or have reasonable grounds for suspecting money laundering or terrorist financing Prohibition against tipping off EU Second Directive – compliance obligations

22. The Proceeds of Crime Act 2002 The Money Laundering Regulations 2003 www.hmso.gov.uk UK implementation of the Second Directive

23. • Applies to practising accountants, auditors and tax advisers without restriction • The ‘all crimes approach’ – any crime which produces financial benefit comes within scope of money laundering law and needs to be reported • Extremely stiff criminal penalties – 5 years jail for failure to report, 2 years jail for failure to set up in-house AML procedures and 14 years jail for active involvement in money laundering Areas of difficulty with the UK approach

24. Use as section divider or to punch home a particular concept. Size and crop photo to fit entire slide frame. Right mouse click on photo and choose ‘order’ then ‘send to back’. The photo will then sit behind the pre-animated keylines and text block. Overwrite the text with a suitable title i.e. ‘Global reach’ For detailed instructions on how to import, position and resize photos, please see the PowerPoint show entitled ‘Photo placement guidelines.ppt’ AML controls AML controls in Australia

25. FATF assessment of Australia’s ML controls (1996) ‘Australia can pride itself on a well-balanced, comprehensive and in many ways exemplary system, and must be congratulated accordingly. It meets the objectives of the FATF recommendations and is constantly reviewing the implementation of their AML provisions, simultaneously looking well ahead into the future.’

26. Adopts two-tier approach to regulation – primary obligations set down in legislation, detailed technical guidance to be set out in AUSTRAC guidance No application to accountants and auditors as such – AML obligations applied only to ‘reporting entities’ which provide ‘designated services’, e.g. − providing a safe deposit box or similar − as a licensed financial adviser, giving personal advice on securities, derivatives, life insurance or pensions − acquiring or disposing of a security on behalf of another person Rec 14 – exemption from liability for tipping off Rec 15 – Institutions to set up in-house control procedures Rec 16 – above provisions to be extended to accountants et al Reg 24 – Governments should regulate parties with money laundering duties The Anti-Money Laundering and counter-terrorism Financing Bill (December 2005)

27. Obligation for reporting entities to carry out CDD checks (though AUSTRAC will identify low-risk circumstances where CDD checks will not be required) Requirement for reporting entities to report to AUSTRAC where − you have reasonable grounds for suspecting that information you have gained from providing a designated service - may be relevant to the investigation of an evasion or attempted evasion of a tax law - may be relevant to the investigation or prosecution of a person for an offence against a law of the Commonwealth or of a Territory - may be of assistance in the enforcement of the Proceeds of Crime Act 2002 or regulations made under it - you have reasonable grounds for suspecting that the provision or prospective provision of the service may be relevant to the investigation or prosecution of a terrorism offence Features of the draft Bill

28. Obligation to put in place wide-ranging, on-going AML programmes within a specified period of providing designated services for the first time; these must aim to identify and materially mitigate the risk that its activities may be used for purposes of money laundering or terrorist financing. AUSTRAC to issue detailed compliance rules Breaches of obligations under the Bill punishable by imprisonment of up to 2 years and 120 penalty units or both Features of the draft Bill (contd)

29. Use as section divider or to punch home a particular concept. Size and crop photo to fit entire slide frame. Right mouse click on photo and choose ‘order’ then ‘send to back’. The photo will then sit behind the pre-animated keylines and text block. Overwrite the text with a suitable title i.e. ‘New directions’ For detailed instructions on how to import, position and resize photos, please see the PowerPoint show entitled ‘Photo placement guidelines.ppt’ Implementing AML controls – issues and options

30. FATF requires governments to regulate activities of accountants only where they prepare or carry out specified activities, viz - Buying and selling real estate Managing of client money, securities and other assets Management of bank, savings and securities accounts Organisation of contributions for the creation, operation or management of companies Creation, operation or management of legal persons or arrangements, and buying and selling of business entities ‘Where a financial activity is carried out … on an occasional or very limited basis… such that there is little risk of ML activity occurring, a country may decide that the application of AML procedures is not necessary, either fully or partially.’ Who needs to be covered by AML controls?

31. Must be a clear legal definition of conduct which gives rise to an obligation to report FATF recommendations say that reportable activities should apply to ‘serious offences’ punishable by imprisonment of at least 6 months Setting a threshold of seriousness would help avoid excessive and innocuous reporting Definition of criminal conduct for ML purposes

32. The draft Bill requires reporting entities to report not on the basis of proof but where they have reasonable grounds for suspicion – need to establish (via AUSTRAC guidance) the meaning of ‘suspicion’ and ‘reasonable grounds’ The meaning of suspicion

33. FATF allows governments to allow professional advisers to make their suspicious activity reports not direct to government agencies but to self-regulatory agencies, e.g. professional bodies Who should accountants report to?

34. AUSTRAC to issue detailed rules to supplement primary legislation Should be adequate to ensure that all members of a firm pass on information to a designated compliance officer/money laundering reporting officer, who should make final reporting decision on firm’s behalf Intra-firm arrangements

35. Essential that regulators respect the confidentiality of advisers who report on their clients – if advisers are obliged not to tip off their clients, the system must not do so either Confidentiality issues

36. Requirements to report clients very difficult issue for professional advisers Risk is that clients will withhold information – threat to quality of professional service and effectiveness of the AML reporting system Implications for adviser-client relationship

37. Chosen form of AML regulation needs - a clear and justifiable purpose - to be effective and proportionate Regulatory effectiveness

38. Accountants must always comply with the law Accept that accountants are part of the financial services sector and may sometimes be privy to information which may be linked to financial crime BUT AML controls must not involve regulation for its own sake – must avoid intrusive bureaucracy and respect integrity of the adviser-client relationship AML controls – final thoughts

39. Closing slide, can be a repeat of the opening slide or a ‘thank you’ as here. This text is set to align at the bottom. Do not change the fonts or sizes used. Thank you