Do you want to access the full text of articles?

Please see our digital edition archive for the full text of articles.

Alternatively:

If you are a Chartered Accountants Ireland member, please visit the RIS service where Accountancy Ireland is available free of charge via the EBSCO databases.

If you are an Accountancy Ireland subscriber (i.e. you pay each year to receive your copy of Accountancy Ireland) please contact our Subscriptions Department quoting your subscription number and include details of the article you want.

All other users should enquire from their local public or college library about accessing full text Accountancy Ireland articles.

Home / ...

Statutory Instrument No.2157 of 2007 introduced the Money Laundering Regulations 2007 (2007 Regulations) into Great Britain and Northern Ireland on 15th December 2007, revoking the Money Laundering Regulations 2003 (2003 Regulations). The 2007 Regulations transpose the provisions of the EU Directive 2005/60/EC on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing (3rd Directive). Mark Kenny highlights the significant differences from the previous antimony laundering (AML) legislation; and also outlines the many legislative requirements that remain unchanged.

The Consultative Committee of Accountancy Bodies (CCAB) recently issued comprehensive guidance interpreting the requirements of the 2007 Regulations and providing best practice guidance on issues not specifically dealt with in the legislation.1 The other primary pieces of legislation governing the UK AML regime referred to in this article are:

-The Proceeds of Crime Act 2002 (POCA 2002); and -The Terrorism Act 2000 (TA 2000).

What’s new? The three main new developments arising from the introduction of the 2007 Regulations are: i The risk-based approach to AML; ii Introduction of the concept of ‘Politically exposed persons’ (PEPs); and iii Definition of beneficial owners.

1. Risk based approach Regulation 20(1) introduces the risk based approach into the UK AML regime by requiring all relevant persons2 to establish and maintain ‘appropriate and risk sensitive’ policies and procedures to enable them to comply with the various requirements of the new regulations. The policies and procedures must cover:

-Customer due diligence (CDD) measures and on-going monitoring; -Reporting; -Record-keeping; -Internal control; -Risk assessment and management; -The monitoring and management of compliance; and -The internal communication of such policies and procedures.

This risk-based approach is intended to ensure that appropriate focus is placed on the higher risk factors of a relevant person’s business and to achieve a more efficient allocation of resources to the prevention and detection of money laundering and terrorist financing offences. It is an acceptance that there is not necessarily only one correct response to the risks, that the offences can never be entirely eliminated and that, apart from not being possible, attempting to introduce a ‘zerofailure regime’ would also be excessively costly.

Paragraphs 4.7 through 4.21 of the CCAB guidance discuss in some detail the development and application of a risk-based approach. The starting point for any relevant person in developing procedures is an assessment of the particular money laundering risks to which the business of that relevant person is exposed.

This assessment may lead the relevant person to conclude that certain services provided are more susceptible to the risk of money laundering than others, or that business activities in certain jurisdictions or with certain categories of client are inherently more or less risky.

The risk assessment should also cover the different types of risk to which the business may be exposed: is the risk that the relevant person could be used actively to launder money (e.g. client accounts, insolvency) or that the clients’ and/or their counterparties could be involved in money laundering (e.g. higher risk person suspects money laundering or terrorist financing, standard due diligence measures are not required when dealing with customers such as:

-A credit or financial institution subject to the requirements of the 3rd Directive (or an equivalent institution in a non-EEA state is supervised for compliance with requirements equivalent to those laid down in the 3rd Directive); -A company whose securities are listed on a regulated market subject to specified disclosure obligations; -A public authority in the UK or other public authorities fulfilling the requirements set out in Schedule 2 of the Regulations.

Enhanced CDD involves applying enhanced identification, verification and on-going monitoring measures on a risk-sensitive basis in three situations specified by Regulation 14, as well as ‘in any other situation which by its nature can present a higher risk of money laundering or terrorist financing’. The three specified situations are:

- where a customer has not been physically present for identification purposes; - correspondent banking relationships with a respondent institution from a non-EEA state; and - business relationships or occasional transactions with ‘politically exposed persons’ (see below).

For each of these three categories, Regulation 14 sets out additional measures required. Regulations 7 and 8 require that CDD and on-going monitoring measures are applied to existing customers on a risk-sensitive basis. Effectively for existing customers, this will require an assessment of the information already available on the customer file. For customer relationships which commenced since the enactment of the 2003 Regulations, 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.

2. Politically exposed persons The concept of a ‘politically exposed person’ (PEP) is a new category of ‘high-risk’ client, for whom enhanced CDD procedures are to be applied. A PEP is defined in Regulation 14(5) as being ‘an individual who is or has, at any time in the preceding year, been entrusted with a prominent public function by a state other than the UK, an EC institution or an international body’. Paragraph 4 of Schedule 2 to the 2007 Regulations gives examples of such people which include heads of states, ministers, members of parliaments and members of administrative management or supervisory bodies of state-owned enterprises. The 2007 Regulations also require enhanced CDD procedures to be applied to a spouse, partner, children and their spouses or partners, parents and ‘close associates’ of the PEP.

3. Beneficial owners Whilst the 2003 Regulations required relevant persons to have identification procedures in place to ensure that reasonable measures are taken to establish the identity of a person on whose behalf the immediate client acts or appears to act, the 2007 Regulations have provided an extensive definition of ‘beneficial owner’. Regulation 6 identifies, for example, a beneficial owner of:

- a company to be an individual owning or controlling more than 25% of the shares or voting rights of -that company; - a trust property to be an individual entitled to a specified interest in at least 25% of the capital of the trust property; and - an estate of a deceased person to be the executor or administrator, etc.

Other Changes The Institute of Chartered Accountants in England & Wales (ICAEW) has produced Tech 08/07: ‘Summary of changes since the second interim guidance’. Other notable changes include the requirement for on-going monitoring of business relationships (Regulation 8), and the potential to rely on certain third parties to apply any of the CDD measures (Regulation 17). These changes are not likely to have a major impact on current practice.

What’s Unchanged? Many of the obligations imposed on practitioners have not been significantly altered by the introduction of the 2007 regulations. Examples of such obligations are: _Identification and record-keeping procedures; _Reporting; _The Privilege Reporting Exemption; _Registration and supervision; _Offences.

Identification and Record- Keeping Procedures Relevant persons continue to have an obligation to obtain and verify the customer’s identity on the basis of documentation or information obtained from a reliable and independent source. Whilst in the 2003 Regulations, verification was to take place as soon as ‘reasonably practicable’ after initial contact between the relevant person and the potential client, under Regulation 14 the general rule for verification is that it should be completed before establishing a business relationship or carrying out an occasional transaction. An exception is made such that verification can be carried out during the establishment of a business relationship where this is necessary not to interrupt the normal conduct of business and there is little risk of money laundering or terrorist financing occurring.

The time period in which identification/verification evidence must be kept remains unchanged, i.e. for at least five years after the date on which a business relationship ends, or five years after the date on which all activities taking place in the course of a one-off transaction (or a series of transactions) have been completed.

Evidence relating to transactions must be kept for five years from the date the transaction was completed.

Reporting The requirement for relevant persons (other than individuals who neither employ nor act in association with other people) to appoint a ‘nominated officer’ with responsibility for internal and external reporting procedures is unchanged. Reporting of suspicions of money laundering activity will still be made to Serious Organised Crime Agency (SOCA) via a Suspicious Activity Report (SAR). SOCA has indicated that, whilst it is currently not mandatory, the agency prefers the standard SAR form to be completed.

The Home Office is proposing that SARs will be standardised either online or in typed format. If the proposals are enacted, the submission of non-standard report formats and/or hand-written reports will become an offence. The information to be reported, however, is unchanged.

In SOCA presentations to Northern Ireland practitioners last September, representatives of SOCA stressed that, while it is not proposed to mandate on-line reporting, it significantly improves the efficiency of the reporting process and assists greatly in the process of investigating and prosecuting alleged money laundering offences.

The Privilege Reporting Exemption The Privilege Reporting Exemption is unchanged by the introduction of the 2007 Regulations. It excludes 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 noncompliance with those standards) from the obligation to report where the knowledge or suspicion of money laundering offences is gained in privileged circumstances. Not all relevant persons are relevant professional advisers. Members of the CCAB bodies, including the ICAI, are within the scope of the exemptions.

There are 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). A clear understanding of whether or not the Privilege Reporting Exemption applies is very important. If it does, then a relevant professional adviser is precluded from submitting a SAR. To do so in such circumstances could expose the adviser to liability in relation to professional confidentiality obligations. In circumstances of doubt, it would be advisable to obtain legal advice.

The CCAB guidance (paragraphs 7.36 and 7.37) provides some examples of where the Privilege Reporting Exemption might apply, such as:

-Advice on taxation matters, where the tax adviser is giving advice on the interpretation or application of any element of tax law and in the process is assisting a client to understand his tax position; -Advice on legal aspects of a takeover bid (e.g. on Companies Act legislation); -Assistance to clients by taking witness statements from the client or from third parties in respect of litigation; and -Representing a client at a tax tribunal.

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. In these circumstances, relevant professional advisers must submit a SAR where they have knowledge of suspicion of money laundering offences arising from the communication. The Privilege Reporting Exemption does not apply where normal audit, bookkeeping and accounts preparation or tax compliance services are being provided.

Registration and Supervision The ICAI continues to be a recognized professional body under the Regulations tasked with the monitoring of relevant persons in its membership. The monitoring function will be carried out by the Chartered Accountants Regulatory Board (CARB).

For members of the ICAI in Northern Ireland, there is no requirement to register elsewhere as a relevant person for the purposes of AML reporting. In order to comply with the Regulations, unqualified accountants, along with money service businesses, high value dealers and trust or company service providers, will be required to register with Her Majesty’s Revenue Commissioners.

Offences The primary money laundering offences are outlined in POCA 2002 (equivalent offences are included under TA 2000) and have not been changed by the introduction of the 2007 Regulations. They include:

-Concealing, disguising, converting or transferring criminal property, or removing criminal property from England, Wales, Scotland, or Northern Ireland (s327); -Entering into or becoming concerned in an arrangement which a person knows or suspects facilitates the acquisition, retention, use or control of criminal property by or on behalf of another person (s328); or -Acquiring, using or having possession of criminal property except where adequate consideration was given for the property (s329).

There are certain exclusions from having committed the above offences, such as where the persons involved did not know or suspect that they were dealing with the proceeds of crime. POCA 2002 also includes the following offences which can be committed by businesses within the scope of the 2007 Regulations (including accountants, auditors, tax advisers and insolvency practitioners):

-Failure to make a money laundering disclosure (ss 330-331); -‘Tipping off’ (s333); and -Prejudicing an investigation (s342).

Under the 2007 Regulations, relevant persons are guilty of an offence if they fail to meet their obligations in terms of applying customer due diligence and on-going monitoring, recordkeeping, establishment of internal policies and procedures, etc. There were similar offences under the 2003 Regulations.

Conclusion The 2007 Regulations have introduced some important aspects to the AML regime in the UK, as discussed above. Significant time and resources are likely to be required in meeting the requirements to identify beneficial owners and PEPs. However, in many ways, the obligations on relevant persons have not changed significantly.

Practitioners who had efficient and effective policies and procedures in place under the previous regime should not find the required changes resulting from the 2007 Regulations to be overly burdensome.

Notes 1 Both the CCAB guidance and a link to the 2007 Regulations are available on www.icai.ie in the technical focus webpage on money laundering in Northern Ireland. 2 References in this article to a ‘relevant person’ are to persons (both natural and legal) acting in the course of business, regulated for AML purposes, carried on by them in Great Britain and Northern Ireland.

Mark Kenny is a Manager in the Representation & Technical Policy Department of the Institute of Chartered Accountants in Ireland.