CA magazine reports on how CAs can fight against financial crime
By CA magazine
2 February 2023
From money laundering to funding terrorism, there’s a typhoon of global financial crime happening right now, much of it in the UK, long seen as a relative soft touch among the wealthier nations. Christian Koch hears ICAS experts explain what CAs can do to ensure their business doesn’t take a battering
Kleptocrats, drug cartels, terrorists, people-traffickers, Putin-friendly oligarchs, mafiosos, money-launderers, bomb-makers, modern slavery gangmasters, tax-dodging charlatans, North Korean nuclear warhead-developers... If accountants find themselves fraternising with such a rogues’ gallery of the villainous and the villain-adjacent, it’s usually because they’re fictional, like money-laundering numbers-guy Marty Byrde in the hit Netflix drama Ozark.
Or so you might think. But today, honest finance professionals are increasingly at risk of becoming unwitting pawns in crimes, economic and otherwise, such as those above. They might have been filing for a charismatic overseas client only to discover the money was being funnelled into an offshore account used for people-smuggling. Or maybe they’ve been implicated in inadvertently helping umbrella companies evade employment law or taxes (a problem costing UK workers and the Treasury an estimated £4.5bn a year). Thanks to the current state of permacrisis (Covid, Ukraine, inflation, recession), such financial crime is on the rise: one recent PwC survey found 64% of British businesses had experienced fraud, corruption or other economic crime within the 24-month period to 2022, a huge leap from just 50% in 2018. Only South Africa has higher economic crime rates. (The global average is 46%.)
Most accountants involved in money laundering might be considered complacent rather than complicit: opting not to renew annual anti-money laundering (AML) training due to budgetary constraints or failing to report suspicious activity because time is short and perhaps the client’s a friend of a friend. Such negligence can result in harsh penalties though: at best, a disciplinary reprimand on icas.com (which will show up every time somebody googles your name); at worst, a prison sentence.
“It’s easy to think that financial crime won’t involve our members,” says Robert Mudge, ICAS’ Executive Director, Regulation. “But if you’re a criminal who wants to fly under the radar, will you go to a Big Four firm or a small firm in a village where it’s less high profile?”
This special report sets out how CAs can avoid being caught in the financial crime maelstrom.
Why is it on the rise?
There’s a nervousness surrounding parts of the accounting industry right now. “When costs such as heating or IT bills go up, there’ll be greater financial pressures on accountants,” says Mudge. “Therefore, they may be less discerning when deciding whether to take on or reject risky new clients.”
He is talking about the cost-of-living crisis, which may lead some finance professionals to be less diligent than usual when it comes to compliance. “With this squeeze, you might get some accountants cutting corners because they need to survive and have no choice,” adds Anna Ruszel, ICAS’ AML Manager. “I’m sure some criminals are ready to exploit accountants – they’re usually a few steps ahead.”
Even before our current economic travails, there were signs financial crime was rising. In January 2022, the government wrote off more than £4.3bn of fraudulent claims for Covid-19 business support loans – many filed by fake shell companies registered in the UK. Meanwhile, the Ukraine crisis has highlighted the scale of illicit Russian money in the UK, as well as the need for tougher laws on international fraud.
“London is now the laundromat for washing dirty cash, and we can’t go on like this,” said Labour MP Margaret Hodge (formerly Chair of the Public Accounts Committee and current Chair of an all-party parliamentary group on anti-corruption) last May. “Our financial services and our defences against dirty money have been overrun.”
Money laundering and other financial crimes are also made easier by the UK’s relatively laissez-faire approach to checking companies. At just £12.99, it’s cheap to register a company in the UK, and the verification process is minimal. Even Companies House admits this, with a website caveat stating it “does not verify the accuracy of the information filed”.
How CAs can become ensnared
Robert Mudge identifies five types of accountant at risk of being embroiled in economic crime:
The overworked sole practitioner
“Smaller firms, especially sole practitioners, are under more pressure to get things done by themselves, which presents challenges for compliance.”
The accountant with the “tick box” attitude
“Sadly, some accountants still view compliance as a tick-box exercise, assuming all they need to do is get a copy of the client’s passport and keep it on file. It needs to be much more in depth than that with a proper risk assessment. [The tick-box mentality] also happens to accountants who’ve had clients for many years and don’t keep up with the required due diligence: some think, ‘Well, I know my clients, I’ve acted for them for 10 years’, or ‘Why would I ask to see their ID when he’s my brother-in-law’s brother?’”
The accountant who doesn’t probe hard enough when unearthing something suspicious
“Few accountants would turn a blind eye when they are confronted with cast-iron proof of a financial crime. But some may not want to investigate further when they see something which might be an issue. We would encourage CAs to exercise more professional scepticism.”
The small practice approached by a big-shot overseas client
“Sometimes small accountancy practices are approached by exciting international clients offering higher fees, with a charismatic person doing the dealings. But these practices are often deliberately targeted because of their small size. Unfortunately, the accountants could become hooked because of the higher fees, finding it difficult to disentangle themselves.”
The CAs mentioned on accounts they’ve never audited
“Because accounts always look better if they’ve been filed by a professional, sadly some criminal firms will find an accountant’s name online and claim their financial documents have been audited and approved by them. The named accountant doesn’t find out until months later.”
The red flags
Warning signs CAs cannot afford to ignore:
Evasiveness or an unexplained spike in income
“If you see a client not cooperating, acting nervous or refusing to provide certain information, that could indicate suspicious activity,” says Ruszel. “Likewise, if turnover has doubled or tripled, with no explanation, it’s a red flag.” Some clients may also find themselves being used as “money mules”, targeted by criminals using their bank accounts to help move stolen cash: the number of under-30s suspected of being money mules surged by nearly 80% in 2021, according to fraud prevention service Cifas.
Clients in high-risk countries
Sanctions now prohibit UK firms from offering accountancy and consulting services to businesses linked to Russia and its ally Belarus, following the Ukraine invasion. While most CAs will be aware of this (along with similar sanctions against North Korea and Iran), the government also urges “the UK’s regulated sector to apply enhanced customer due diligence” when dealing with around 30 other high-risk jurisdictions, including Gibraltar – a British territory – the Philippines, the UAE and Barbados.
Cash-based businesses
“Businesses that deal primarily in cash are usually high risk,” says Ruszel. “If you want to onboard a cash-intensive business, you’ll need to monitor it.”
A high turnover of accountants
“If you’re the fourth accountant a client has had in five years, it could be another warning,” says Jeremy Clarke CA, ICAS’ Assistant Director, Practice.
An unusual DOB for a PSC
A PSC (or “person with significant control”) must be disclosed on Companies House records, which should mean the company owner can’t hide their identity should they, say, be looking to transfer illegal assets via a shell company. With more than four million businesses on the Companies House register, not all PSCs are real: around 4,000 people aged two or under apparently own UK companies, according to a 2018 report from anti-corruption group Global Witness.
Also, look out for typos: some criminals deliberately misspell their name multiple ways to thwart data searches.
Your client has suspicious materials
In September 2022, the UK’s new rules on proliferation financing came into force, requiring “regulated entities” to “identify, assess and mitigate the risk of proliferation financing”. Broadly speaking, proliferation financing is any funding relating to nuclear, chemical or biological weapons – a pertinent problem given North Korea and Iran have both been successful in evading sanctions and exploiting western businesses in recent years.
“If you’ve got a client who makes, say, fertilisers or microchips, it’s possible they’re inadvertently making parts for bombs or missiles,” says Clarke. “You need to be alive to ‘dual use goods’ as not reporting a sanctions breach if they’re specified goods is a criminal offence.”
A client using an SLP or NILP
Scottish limited partnerships (SLPs) were originally established in the early 1900s for farm holdings, but the archaic business structure has seen a 21st-century revival with criminals using them as shell companies, such as the “Russian laundromat” money-laundering scheme which used SLPs to move £16bn of dirty money from Russia from 2000-14. Clarke notes this criminal activity has largely “moved onto NILPs” (Northern Ireland limited partnerships) now instead.
Fighting financial crime
What every CA needs to be doing right now…
What if I find something suspicious?
You may need to file a suspicious activity report (SAR) with the National Crime Agency (NCA). “We’d always advise CAs to follow their gut,” says Mudge. “If you think there’s sufficient grounds, it’s better to err on the side of caution and over-report rather than under-report.”
Why are SARs important?
Intelligence from professional services is essential in the battle against financial crime. Although only 1.06% of all SARs filed in the three-year period to 2017 were from accountants, with the vast majority (80%) coming from banks, reports from accountants and lawyers are often very useful. Think of your report as being like one of the items in the detective investigation wall seen in cop shows, all red threads and pinned photos.
Says Ruszel: “The NCA receives SARs from other sources, such as lawyers, estate agents or banks, before they can really see the bigger picture of financial crime. This can mean that some investigations will last for years, because they’re missing one piece of the jigsaw. Your SAR could be that missing piece.”
How do I disengage from a shady client? I don’t want to offend them…
Filed your SAR? Then the next step is to consider ditching that client. “Unlike barristers, accountants have the luxury of deciding who their clients are,” says Clarke. “Sometimes this takes real diplomacy, but protecting your professional reputation is more important than not causing offence.”
And if I don’t find anything dubious?
It’s still important to undertake regular compliance, as well as staff training in AML at least once a year. A half-day AML course through ICAS costs £500. Given the penalties for non-compliance, it’s a savvy investment.
For those finance professionals who complain that compliance is too time-consuming (the average firm spends four days a month on paper-based AML vetting), it’s worth investigating identity-checking software such as Amiqus which can complete the tasks within hours.
If I fail to keep up with compliance because I’m too busy, will I still get in trouble?
Yes! This could entail serious reputational damage in the form of a rebuke on icas.com (note: because prospective clients will inevitably google your name, this isn’t good for future business).
More serious offences could result in prosecution and a hefty fine or even a custodial sentence.
The future
Blockchain
Blockchain’s big benefit is its speed: crypto evangelists regularly enthuse that it can whittle financial procedures that take hours or days (such as AML) down to a few seconds. As such, it can play a role in combating financial crime. “Only a really stupid criminal – or a very good one – would use crypto,” says Clarke. “To experienced investigators it’s usually incredibly transparent; you can see an awful lot of what’s going on.”
But experts still advise caution. “There are transparent crypto exchanges, but there are also non-transparent exchanges called ‘tumblers’,” says Ruszel. “Some crypto exchanges are like tax havens: if a banking transaction goes through a high-risk jurisdiction, such as the British Virgin Islands, authorities can lose the trail.”
What the government should be doing
The government is expected to bring in new measures, such as reforming Companies House, and introducing a public register of beneficial ownership of property (which would unmask individuals behind offshore companies with expensive UK homes and land). The government has also discussed making it an offence for senior executives to “fail to prevent” crimes such as money laundering. It is also considering establishing a dedicated office for financial whistleblowers.
Last May, the Department for Business talked about relaxing accounting rules for SMEs, arguing the workload could distract such firms from focusing on growth and job creation. However, given smaller firms are increasingly becoming entangled in money laundering, fraud and tax evasion, critics such as Hodge argue it could hinder- attempts to tackle financial crime and reduce transparency around small company accounts.
Meanwhile, Clarke warns of “the tendency to push law enforcement onto non-law enforcement agencies… We need to fund the NCA and regional police better. The number of financial experts working for police and prosecution services is shockingly low given how much financial crime goes on – there are not nearly enough forensic accountants. If you’re going to be serious about financial crime, don’t push the workload down onto the professions, thinking that’s how you solve the problem.”
In conclusion
“White-collar crime is much misunderstood,” says Ruszel. “It’s not a victimless crime. Behind many money-laundering operations, you could find child labour, modern slavery or drug dealing. Every CA has a responsibility to fight financial crime and shouldn’t view AML regulations as a burden or red tape.
“If you think your client is a drug dealer or running a prostitution ring, do you really want to work for them?” says Clarke. “The answer should always be no.”
Access more AML resources at icas.com/professional-resources/anti-money-laundering
